Question

Direct labor is sometimes the appropriate basis for assigning overhead cost to products.

It is appropriate to use direct labor when which of the following is true?
(1) Direct labor constitutes a significant part of total product cost.
(2) A high correlation exists between direct labor and changes in the amount of
overhead costs.
A) (1) only
B) (2) only
C) Either (1) or (2)
D) Both (1) and (2)

Answer 1

Direct labor is an appropriate basis for assigning overhead costs to products when either direct labor constitutes a significant part of total product cost or a high correlation exists between direct labor and changes in the amount of overhead costs.

Step-by-step explanation:

Direct labor is an appropriate basis for assigning overhead costs to products when either (1) direct labor constitutes a significant part of total product cost or (2) a high correlation exists between direct labor and changes in the amount of overhead costs. In both scenarios, direct labor can serve as a reliable indicator of the amount of overhead costs incurred in producing a product.

For example, if direct labor makes up a significant portion of total product cost, it suggests that labor-intensive activities are a major driver of overhead costs. Similarly, if changes in direct labor consistently result in proportional changes in overhead costs, it indicates a strong correlation between the two, making direct labor an appropriate basis for assigning overhead costs.