Chapter 4, Problem 1Q

Under what conditions is direct labor a valid basis for allocating overhead?

To determine

Direct Labor Cost: Direct labor cost is the cost of the labor paid to the employees who are directly involved in the conversion of the raw materials to the finished products. For example: Wages paid to the mechanic.

To Explain: The valid basis for allocating direct labor as overhead.

Explanation of Solution

The valid basis for allocating direct labor as overhead is as follows:

• If direct labor forms to be a major part of the total product cost, then the direct labor could be allocated as overhead.
• If there is a direct impact of direct labor on the overhead costs then the direct labor could be allocated as overhead.