Question

Two of the reasons why manufacturing overhead may be underapplied are: (1) the estimated total manufacturing overhead cost may have been too high; and (2) the estimated total amount of the allocation base may have been too low.

Answer 1

Underapplied manufacturing overhead may result from overestimating overhead costs or underestimating the allocation base, which are influenced by aspects like diseconomies of scale and government policies affecting production cost measurement.

Step-by-step explanation:

The question pertains to manufacturing overhead and its potential underapplication due to errors in estimated costs and allocation bases. When a company sets an estimated total manufacturing overhead cost too high, or if the estimated total amount of the allocation base is too low, underapplied overhead can occur. This miscalculation in overhead costs can stem from factors such as changes in production levels, which may be reflected in increased costs due to diseconomies of scale. Diseconomies of scale occur when a factory becomes too large, leading to management difficulties, communication barriers, and workflow disruptions, all of which contribute to higher production costs. Furthermore, external factors like government interference in market prices and protectionist measures can affect the measurement and application of true production costs.