Using direct labor costs to allocate overhead costs in an activity-based costing (ABC)system will encourage management to reduce labor costs.

Question

Quizplus · Accepted Answer

Allocating overhead on the basis of direct labor can lead to the perception that labor costs are a major driver of overhead costs, and therefore create incentives to reduce labor costs. However, this approach may not accurately reflect the true drivers of overhead costs, and may instead discourage investments in activities that are critical to the long-term success of the business. Therefore, using a more comprehensive approach like activity-based costing (ABC) can provide a better understanding of the true drivers of overhead costs and enable more informed decision-making.

Using Direct Labor Costs to Allocate Overhead Costs in an Activity-Based