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
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