Departmental overhead rates applied on the basis of a single activity measure will eliminate any distortions in unit costs due to product diversity.

Question

Quizplus · Accepted Answer

Departmental overhead rates applied on the basis of a single activity measure may still result in distortions in unit costs due to product diversity. For example, if two products use the same activity measure to allocate overhead costs but one product requires significantly more setup time or machine usage than the other, the unit cost for the product with higher usage will be overstated while the unit cost for the product with lower usage will be understated. To avoid such distortions, multiple activity measures or other allocation methods may be used.

Departmental Overhead Rates Applied on the Basis of a Single