A firm chooses to allocate overhead cost using a method that provides the most favorable result rather than attempting to find a true allocation base. This practice will misrepresent the cost of the job, and could be considered unethical.
An allocation base is the basis on which cost accounting allocates overhead costs. Overhead allocation is the use of indirect costs to produced goods. Thus, it is required under the rules of various accounting frameworks.
So when a firm uses a method that provides the most favorable result to allocate overhead cost, without attempting to find a true allocation base. So this practice can misrepresent the cost of the job, and be considered unethical.
Hence, overhead cost can directly impact on small business's balance sheet and income statement.
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