Manufacturing overhead is overallocated if the amount
A. estimated for the period is greater than the actual amount incurred.
B. allocated during the period is greater than the actual amount incurred.
C. allocated during the period is less than the actual amount incurred.
D. amount estimated for the period is less than the actual amount incurred.
The correct answer and explanation is:
The correct answer is B. allocated during the period is greater than the actual amount incurred.
Manufacturing overhead is considered overallocated when the amount of overhead allocated to production exceeds the actual overhead incurred during a period. This can happen because companies typically estimate manufacturing overhead at the beginning of a period based on certain assumptions, such as labor hours, machine hours, or production levels. Then, the overhead is allocated to products or services using a predetermined overhead rate.
If the allocated overhead is more than the actual costs incurred, the company has overallocated overhead. Overallocation occurs when the applied overhead exceeds the actual overhead expenses. This could happen for several reasons, such as overestimating the required resources or using an overly conservative estimate for certain cost drivers. Overallocated overhead indicates that the company has charged more overhead costs to its products or services than was actually necessary.
When this overallocation happens, businesses will typically adjust for it at the end of the period. The excess amount can either be absorbed into the cost of goods sold or adjusted in the financial statements to reflect the true cost. This adjustment ensures that the financial records accurately reflect the actual expenses incurred during the period.
In contrast, underallocation occurs when the allocated overhead is less than the actual amount incurred, which could result from underestimating the overhead costs or an underestimation of the cost drivers. However, in this case, the focus is on the scenario where the overhead allocation exceeds the actual incurred costs, making option B the correct answer.