Question

Sable Company uses direct labor hours as the cost allocation base for allocating manufacturing overhead. At the end of the period overhead is underallocated. This implies that. A) Overhead costs were lower than expected. B) Overhead costs were higher than expected or less labor hours were worked than expected. C) Cost of goods sold should be adjusted downward when the overhead account is closed. D) Overhead costs were lower than expected and more labor hours were worked than expected.

Answer 1

Overhead costs were higher than expected or less labor hours were worked than expected

Step-by-step explanation:

Overheads are charged to units produced by the means of using an estimated overhead absorption rate. This rate is computed using budgeted overhead and budgeted activity level (labour hours)

As a result of this, overhead charged to total units product might be over or under absorbed compared to the actual amount incurred.

Over-absorbed overhead implies that the overhead charged using labour hours were higher than the actual overhead incurred.

Under absorbed overhead implies that the overhead charged using labour hours were lower than the actual overhead incurred.

Overhead costs were higher than expected or less labor hours were worked than expected

Answer 2

B) Overhead costs were higher than expected or less labor hours were worked than expected.

Step-by-step explanation:

When using the direct labour hours to allocate cost, the overhead rate is calculated by dividing estimated overhead cost for a period by the estimated activity for that period.

The base that is estimated activity, is in direct labour hours, direct labour cost, or machine hours.

For Sable company to have an excess overhead it means in this ratio either the numerator is higher than estimated, or the denominator is less than expected.

The option that fulfils this is - Overhead costs were higher than expected or less labor hours were worked than expected.

The overhead cost were underestimated by the company.