Final answer:
Volume-based rates are suited for situations where factory overhead is closely linked to a single cost driver, helping to allocate fixed and variable costs accurately based on usage.
Step-by-step explanation:
Volume-based rates are most appropriate in situations where the incurrence of factory overhead is related to a single, common cost driver. Factory overhead consists of both fixed costs and variable costs. Fixed costs, such as rent on a factory, do not change regardless of the level of production. On the other hand, variable costs, such as labor and raw materials, fluctuate with the output level. When overhead costs are strongly correlated with a single factor, like machine hours or labor hours, a volume-based costing system can accurately allocate costs based on that common cost driver's usage.