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Which three activity bases are commonly used to allocate factory overhead to jobs?
AUnits sold, sales revenue or machine hours
BDirect labor cost, units produced or batches
CDirect labor cost, labor hours or machine hours
DMachine hours, units produced or floor space
Answer & Solution
Correct answer: C. Direct labor cost, labor hours or machine hours
1. Factory overhead cannot be traced to a particular job, so it is allocated using an activity base that estimates its consumption.
2. The three common bases are a percentage of direct labor cost, the number of direct labor hours and the number of machine hours.
3. When hours are the base, a predetermined factory overhead rate is multiplied by the number of hours.
4. Units sold and sales revenue measure selling activity, not factory activity, so they are not used here.
5. Each company picks the base that makes sense for it, so the process can vary between companies.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 2.1 Introduction_
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