Florida General Contractor Practice Exam

What is the recommended way to allocate fixed overhead?

1. Based on sales volume alone

2. Evenly across all products

3. According to usage of each resource

4. Using a historical cost approach

The correct answer is: Evenly across all products

Allocating fixed overhead evenly across all products is often recommended because it simplifies the cost allocation process and ensures that each product bears an equal share of the overhead costs. This method assumes that fixed costs are incurred uniformly regardless of production levels. By distributing these costs evenly, a company can maintain consistency in pricing and help prevent fluctuations in profitability caused by variations in production volumes. This approach is particularly useful in a stable production environment where the products share similar production processes and resources. Other methods of allocation, such as basing it solely on sales volume or historical costs, may lead to skewed results, as they do not necessarily reflect the actual resource consumption by each product. Additionally, allocating based on usage of each resource may complicate the process and require detailed tracking of resource use, which may not always be feasible. Therefore, the even allocation method provides a straightforward and efficient means of managing fixed overhead costs.