Answer (D) is correct . Allocating overhead on the basis of the number of units produced is usually not appropriate. Costs should be allocated on the basis of some plausible relationship between the cost object and the incurrence of the cost, preferably cause and effect. The fixed portion of overhead costs is incurred regardless of the level of production. When multiple products are involved, the number of units of production may bear no relationship to the incurrence of the allocated cost. If overhead is correlated with machine hours but different products require different quantities of that input, the result may be an illogical allocation. However, if a firm manufactures only one product, this allocation method may be acceptable because all costs are to be charged to the single product.
Answer (A) is incorrect because The number of units of production may have no logical relationship to overhead when several different products are made.
Answer (B) is incorrect because A low level of direct labor costs means that fixed overhead is substantial, and an appropriate cost driver should be used to make the allocation.
Answer (C) is incorrect because The allocation should be made on the basis of the appropriate cost drivers without regard to the relationship between direct materials and labor costs.
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