In the departmental overhead rate method, key assumptions include departmental overhead costs being proportional to the departmental allocation base and products being similar in volume, complexity, and batch size, guiding cost allocation in businesses.
Cost driver means an observable metric used to measure the relationship between direct and indirect costs within a cost center. One key assumption in the departmental overhead rate method is that departmental overhead costs are proportional to the departmental allocation base, allowing for accurate allocation of costs.
Another assumption is that different products are similar in volume, complexity, and batch size, facilitating the allocation of overhead costs based on factors common to all products. Understanding these assumptions is crucial for effective cost allocation in businesses.
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