Overhead allocation based on volume alone:

Question

Quizplus · Accepted Answer

Overhead allocation based on volume alone ignores the fact that high-volume products may consume fewer resources per unit, leading to overcosting of these products. Similarly, low-volume products may consume more resources per unit, leading to undercosting of these products. This is a limitation of traditional costing methods, which can be overcome by activity-based costing. Option A is incorrect as ABC is specifically designed to avoid this limitation. Option C is the opposite of the correct answer, and option D is incorrect as there is no requirement to use volume-based overhead allocation for external financial reporting.

Overhead Allocation Based on Volume Alone