Why May Departmental Overhead Rates NOT Correctly Assign Overhead Costs

question 61

Multiple Choice

Why may departmental overhead rates NOT correctly assign overhead costs?

• A) Because of the use of direct labour hours in allocating overhead costs to products rather than machine time or quantity of materials.
• B) Because of the high correlation between direct labour hours and the incurrence of overhead costs.
• C) Because of the over-reliance on volume as a basis for allocating overhead costs where products differ regarding the number of units produced, lot size, or complexity of production.
• D) Because of the difficulties associated with identifying cost pools for the first stage of the allocation process.

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Definitions:

Accumulated Earnings

Profits that a company retains for reinvestment rather than distributing to shareholders as dividends.

Petition

is a formal written request, typically addressed to a court or a government institution, appealing for a particular cause or action.

Injunction

A legal order issued by a court that directs an individual or entity to do or not do a specific action.

Earned Surplus Test

A financial measure used to determine the amount of income that a company has earned and is available for dividends distribution after accounting for all necessary expenses.