Question

How is overallocated and underallocated manufacturing overhead calculated?

1) By comparing estimated manufacturing overhead to actual manufacturing overhead
2) By comparing actual manufacturing overhead to estimated manufacturing overhead
3) By dividing estimated manufacturing overhead by actual manufacturing overhead
4) By dividing actual manufacturing overhead by estimated manufacturing overhead

Answer 1

Overallocated and underallocated manufacturing overhead is determined by comparing estimated manufacturing overhead to actual manufacturing overhead, with overallocation occurring when estimated costs are higher and underallocation when actual costs exceed estimates.

Step-by-step explanation:

The calculation of overallocated and underallocated manufacturing overhead involves comparing the estimated manufacturing overhead costs with the actual costs incurred during a specific period. When the actual manufacturing overhead costs are higher than the estimated costs, this condition is known as underallocated overhead. Conversely, when the estimated overhead costs exceed the actual costs, this is referred to as overallocated overhead. Therefore, the correct process for calculating overallocated and underallocated manufacturing overhead is option 1) By comparing estimated manufacturing overhead to actual manufacturing overhead.

This concept of allocation is related to determining the cost of production, and it is crucial for businesses to accurately calculate these figures to reflect true production costs. Understanding the relationship between estimated and actual overheads assists firms in adjusting their costing models and pricing strategies. Firms work to ensure that their average cost of production remains competitive against the market price to secure profits.