Insight Box Concept Check 1 If a company uses the wrong cost driver to allocate
ID: 2409894 • Letter: I
Question
Insight Box Concept Check 1
If a company uses the wrong cost driver to allocate manufacturing overhead, it will
offset the same with another product and there will be no effect on estimated product cost.
wrongly estimate the total production cost for a product.
adjust itself in the following period.
not effect the estimated product cost because factory overhead and general overhead allocation are irrelevant to product costing.
offset the same with another product and there will be no effect on estimated product cost.
Explanation / Answer
Correct Answer: wrongly estimate the total production cost for a product.
Explanation:
The cost drivers decide the cost behavior within the activities, reflecting the linkages that these have with other activities and interrelationships that affect them.
A cost driver manage to allocate manufacturing overhead. The correct allocation of manufacturing overhead is very important for determining the true cost of a product. This helps the management in the determination of the product's price. Therefore, If a company uses the wrong cost driver to allocate manufacturing overhead, it will have a direct impact on the profitability and operations of an entity. resulting in wrongly estimate the total production cost for a product.