2 WHEN DIRECT LABOR IS USED AS AN ALLOCATION BASE FOR OVERHEAD, IT I...

8-2 When direct labor is used as an allocation

base for overhead, it is implicitly assumed that

changes some of the key measures such as prod-

uct costs used in making decisions and may affect

overhead cost is directly proportional to direct

how individuals are evaluated. Without top man-

labor. When cost systems were originally devel-

agement support, there may be little interest in

oped in the 1800s, this assumption may have

been reasonably accurate. However, direct labor

making these changes. In addition, if top manag-

has declined in importance over the last hundred

ers continue to make decisions based on the

years while overhead has been increasing. This

numbers generated by the traditional costing sys-

suggests that there is no longer a direct link be-

tem, subordinates will quickly conclude that the

tween the level of direct labor and overhead. In-

activity-based costing system can be ignored.

deed, when a company automates, direct labor is