An essential quality of an overhead allocation base is that it must:

• A. only include direct material costs
• B. be unrelated to production volume
• C. be the same for all departments regardless of activity
• D. have a direct relationship with the incurrence of overhead costs

Answer: (D)

Verified step by step guidance

1. Understand the concept of overhead allocation: Overhead allocation is the process of assigning indirect costs (such as utilities, rent, and administrative expenses) to products or services based on a specific allocation base.
2. Recognize the importance of the allocation base: The allocation base should have a direct relationship with the incurrence of overhead costs. This ensures that overhead is distributed fairly and accurately across products or services.
3. Eliminate incorrect options: Analyze the given options and identify why they are not suitable. For example, 'only include direct material costs' is incorrect because direct material costs are not related to overhead. Similarly, 'be unrelated to production volume' is incorrect because production volume often drives overhead costs.
4. Focus on the correct characteristic: The allocation base must reflect the activity or factor that causes overhead costs to be incurred. Common examples include machine hours, labor hours, or production volume.
5. Conclude with the correct answer: The essential quality of an overhead allocation base is that it must have a direct relationship with the incurrence of overhead costs, ensuring accurate and fair cost distribution.