Final answer:
The claim that overallocated indirect costs occur when the allocated amount exceeds the actual incurred amount is false. 'Overallocation' refers to a situation where estimated overheads exceed the actual expenses. Proper cost allocation is essential for accurate financial reporting and pricing strategy.
Step-by-step explanation:
The statement that overallocated indirect costs occur when the allocated amount of indirect costs is greater than the amount incurred for that period is false. By definition, overallocation of indirect costs happens when the estimated or predistributed costs exceed the actual costs. Conversely, underallocation occurs when the allocated costs are less than the actual costs incurred. Indirect costs, also known as overheads, are expenses that are not directly tied to a specific product or service but are necessary for the overall operation of a business. Examples include rent, utilities, and administrative salaries.
Accurately allocating these costs is crucial for determining product pricing, profitability, and for financial reporting purposes. Companies use various methods to allocate indirect costs, such as direct labor hours, machine hours, or direct labor costs. When businesses apply these allocation bases, they aim to estimate their actual expenditures closely. At the end of an accounting period, they will adjust for any variances between estimated and actual costs. An overallocation would typically indicate that the estimates were too high and that adjustments are necessary to reconcile the variance.