Allocation bases that do not drive overhead costs: a. will not accurately measure costs used b. by jobs will always cause job costs to be overstated
c. are difficult to keep track of d. cannot be used to calculate overhead e. can cause product costs to be distorted
The Correct Answer and Explanation is :
The correct answer is e. can cause product costs to be distorted.
Explanation:
In cost accounting, allocation bases are used to distribute overhead costs to products or jobs. Overhead costs typically include indirect expenses such as utilities, rent, and administrative salaries that cannot be traced directly to a specific product. These costs need to be allocated based on some logical metric, or allocation base, that reflects how overhead costs are incurred in producing different products.
Common allocation bases include:
- Direct labor hours
- Machine hours
- Direct labor costs
- Units produced
An allocation base that does not drive overhead costs means that it does not accurately reflect the relationship between the incurred overhead and the activities that cause these costs. For example, using direct labor hours as an allocation base in an automated factory, where machines (not labor) drive the overhead, would be an inappropriate base. This mismatch can cause significant distortions in product costs.
When the wrong allocation base is used, some products may be allocated more overhead costs than they actually use, while others may receive less. This results in product cost distortion, leading to incorrect pricing decisions. Overstating the cost of some products might make them less competitive in the market, while understating the costs of others could result in selling at a loss or at lower-than-necessary margins.
Cost distortions can also affect internal decision-making, like evaluating product profitability or making production adjustments. Therefore, choosing a base that aligns with the drivers of overhead costs is essential for accurate cost measurement and proper decision-making.