Direct labor is an appropriate allocation base for overhead when overhead costs and direct labor are highly correlated.

Question

Quizplus · Accepted Answer

Direct labor can be a good allocation base because it is often correlated with overhead costs. For example, if a company's manufacturing process requires a lot of labor-intensive work, then more direct labor hours will likely result in more overhead costs for things like electricity, maintenance, and equipment depreciation. However, it's important to note that direct labor may not always be the most appropriate allocation base depending on the nature of a company's operations. In some cases, it may make more sense to use machine hours, units produced, or some other allocation base instead.

Direct Labor Is an Appropriate Allocation Base for Overhead When