Allocations of overhead should not affect a project's incremental cash flows unless the:
A) project actually changes the total amount of overhead expenses.
B) overhead will not be recovered at the end of the project.
C) overhead is not currently fully allocated to existing projects.
D)accountant is required to allocate costs to this project.

Question

Quizplus · Accepted Answer

Overhead allocation is a method used by accountants to assign indirect costs to individual products or projects. Overhead expenses are the costs of running a business that cannot be directly attributed to a specific product or project, such as rent, salaries of support staff, and utilities. The allocation of overhead costs is arbitrary and should not affect a project's incremental cash flows unless the project changes the total amount of overhead expenses. In other words, if the project requires additional resources that lead to increased overhead costs, then the incremental cash flows will be affected. Otherwise, overhead allocation has no impact on incremental cash flows. Therefore, choice A is correct.

Allocations of Overhead Should Not Affect a Project's Incremental Cash