There should be a cause and effect relation between the overhead allocation base and overhead costs.

Question

Nasim Jenkins · Accepted Answer

Final Answer : True, Explanation :  The overhead allocation base is used to allocate overhead costs to products or services in a systematic and consistent manner. The allocation base should be chosen based on the cause and effect relationship between the allocation base and the overhead costs. For example, direct labor hours may be used as an allocation base for manufacturing overhead costs because there is a causal relationship between the amount of direct labor used and the amount of overhead costs incurred. Therefore, there should be a cause and effect relationship between the overhead allocation base and overhead costs.

There should be a "cause and effect" relation between the overhead allocation base and overhead costs.

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