Cost allocation relies on drivers to assign indirect costs to cost objects. Which statement is true?

• A. It is not used in pricing decisions.
• B. It relies solely on depreciation.
• C. It uses drivers such as square footage, headcount, and activity measures to assign indirect costs to cost objects.
• D. It assigns overhead randomly.

Answer: (C)

Indirect costs must be spread to cost objects using a driver that reflects how much of those resources each object uses. Because overhead can’t be traced directly, we choose measurable factors that correlate with resource consumption. Examples include square footage of facilities used, the number of employees supporting the object, or specific activity measures like the number of setups or hours of machine operation. Using these drivers ties the allocated overhead to actual usage, making product costs more accurate and informing pricing and profitability analysis. Depreciation, while one overhead element, is not the sole driver, and overhead isn’t allocated randomly or ignored in pricing.