Overhead absorption rate based on direct material cost = (Overheads / Material cost) × 100. This is best when:
AMachines drive cost
BLabour cost varies more
CMaterial cost dominates total cost
DSales drive cost
Answer & Solution
Correct answer: C. Material cost dominates total cost
1. Choice of absorption base should match the prime driver of overhead consumption.
2. When material cost dominates the total cost structure, overhead is well-correlated with material consumption.
3. In such cases the percentage-on-material method gives a fair allocation.
4. Hence the method is preferred when material cost dominates total cost.
_Source: ICAI BoS Inter Paper 3, Ch 4 "Overheads", §4.5.1 ¶3_
Related questions
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