Anderson Company produces a variety of products,some in labor-intensive departments and some in heavily automated departments.Using a companywide overhead allocation rate based on direct labor will result in overcosting some products and undercosting others.

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Using a companywide overhead allocation rate based on direct labor assumes that all products use overhead resources in the same way, which may not be the case. Labor-intensive departments may use more overhead resources than heavily automated departments, which could result in overcosting of the labor-intensive products and undercosting of the automated products. A more accurate method of allocating overhead costs would be to use activity-based costing (ABC), which assigns overhead costs based on the specific activities that consume them.

Anderson Company Produces a Variety of Products,some in Labor-Intensive Departments