Final answer:
The two primary reasons for using longer periods like a year to calculate indirect cost rates are to achieve a more accurate allocation of fluctuating overhead costs and to provide a clearer picture of inflation by smoothing out short-term volatility.
Step-by-step explanation:
There are two primary reasons for using longer periods like a year to calculate indirect cost rates. First, longer periods allow for a more accurate spread of costs that do not directly link to specific items or activities and may fluctuate throughout the year; this includes utilities, rent, and administrative salaries. By assessing these costs on an annual basis, organizations can avoid the distortions caused by seasonal variations or one-off events, leading to a fairer allocation of these overheads to various products or services.
Secondly, when it comes to calculating inflation rates, using a full year as the period helps in smoothing out short-term volatility and gives a clearer picture of long-term price changes. This is done by comparing index numbers across years with a chosen base year serving as a benchmark, usually set to 100, to facilitate an easy understanding of the percentage change in prices over time.
Index numbers are preferred over dollar values to measure price levels because they provide a standardized way to account for the general price movement, which isn't influenced by the changes in the quantity or quality of goods. This method of using index numbers and a base year simplifies the complexity of the data, making it more accessible for analysis and decisions.