If allocated indirect costs are $1500 and actual indirect costs are $1200, this situation is termed __________?
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Answer: D. over allocated indirect cost
Explanation
When allocated indirect costs exceed actual costs, the difference is over-allocated. Allocated indirect costs of fifteen hundred exceed actual costs of twelve hundred dollars. This positive difference of three hundred dollars represents over-allocated indirect cost. Over-allocated overhead occurs when predetermined allocation rates are set too high. Cost accountants must clear these over-allocated balances at the end of the fiscal year. Monitoring indirect cost variances ensures financial statements reflect accurate expenses.
Manufacturing firms adjust cost of goods sold for over-allocated overhead annually. Large overallocated balances indicate that products may have been assigned excessive costs. Accurate overhead allocation is essential for setting competitive product pricing strategies. Applied indirect cost describes the allocation process rather than the variance itself. Applied direct cost refers to direct resource assignments rather than indirect overhead. Incurred indirect cost represents actual expenses rather than the allocated cost variance.
- Subject
- Accounting and Finance
- Category
- Accounting
- Topic
- —
- Difficulty
- medium
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