Why is choosing the correct cost driver to estimate indirect manufacturing costs important?
A) Identifying the wrong driver can lead management to incorrect and costly decisions
B) Identifying the wrong driver can increase actual overhead costs
C) Identifying the wrong driver can increase the usage of the correct driver
D) Identifying the wrong driver can increase the direct costs of the cost object

Question

Quizplus · Accepted Answer

Choosing the correct cost driver to estimate indirect manufacturing costs is crucial because if the wrong driver is selected, it can lead to incorrect and costly decisions. For example, if a cost driver is chosen that does not have a strong correlation with the actual indirect manufacturing costs, management may end up allocating too much or too little overhead to a particular cost object, which could result in incorrect pricing decisions or inefficient resource utilization. Therefore, it is important to carefully select the most appropriate cost driver to allocate indirect manufacturing costs accurately.

Why Is Choosing the Correct Cost Driver to Estimate Indirect