Final answer:
The indirect allocation method is used when one cost pool is used to allocate overhead costs to products for all departments.
Step-by-step explanation:
The correct answer is 2) Indirect allocation method.
When one cost pool is used to allocate overhead costs to products for all departments, it is known as the indirect allocation method. In this method, the overhead costs are allocated to products based on a predetermined allocation base, such as direct labor cost or machine hours.
For example, if a company has a single cost pool for all departments and allocates overhead costs based on direct labor cost, a product with higher direct labor costs would receive a larger share of the overhead costs. This method is commonly used in traditional costing systems.
When one cost pool is used to allocate overhead costs to products for all departments, the direct allocation method is in use.
This method implies a single, company-wide rate is applied, which is a simplistic approach and may not be as accurate as methods that take into account the diverse activities that incur costs within different departments. Alternatives like the activity-based costing (ABC) method, allocate costs more precisely based on actual activities that drive overhead.