Which of the following best describes what an allocation base should be in accounting?

• A. A fixed percentage applied to all expenses regardless of activity
• B. A measure unrelated to the actual consumption of resources
• C. A factor that has a direct cause-and-effect relationship with the cost being allocated
• D. A random value chosen to distribute costs equally among departments

Answer: (C)

Verified step by step guidance

1. Understand the concept of an allocation base: In accounting, an allocation base is a factor used to assign costs to cost objects, such as departments, products, or services. It should reflect the actual consumption of resources and have a direct cause-and-effect relationship with the costs being allocated.
2. Analyze the options provided: Review each option to determine whether it aligns with the definition of an allocation base. For example, a fixed percentage applied to all expenses regardless of activity does not account for actual resource usage, and a random value chosen to distribute costs equally among departments lacks a cause-and-effect relationship.
3. Focus on the correct definition: The correct allocation base should be a factor that directly correlates with the cost being allocated. This ensures that costs are distributed fairly and accurately based on resource consumption.
4. Eliminate incorrect options: Discard options that do not meet the criteria of a direct cause-and-effect relationship or are unrelated to actual resource usage.
5. Select the correct answer: Based on the analysis, choose the option that best describes an allocation base as a factor with a direct cause-and-effect relationship with the cost being allocated.