Question

When the allocated amount of indirect costs are less than the actual amount, indirect costs have been:

A) overabsorbed
B) underapplied
C) underallocated
D) Both underapplied and underallocated are correct.

Answer 1

Indirect costs are considered underallocated when the allocated amount is less than the actual amount. Overabsorbed costs occur when the allocated amount is more than the actual amount.

Step-by-step explanation:

When the allocated amount of indirect costs is less than the actual amount, it means that indirect costs have been underallocated. This means that the amount set aside for indirect costs in the budget is not enough to cover the actual costs incurred.

In contrast, when the allocated amount of indirect costs is more than the actual amount, it is considered overabsorbed. This means that the budgeted amount for indirect costs is higher than the actual costs.

Therefore, option A) overabsorbed is incorrect. The correct answer is option C) underallocated.