Can someone look at this? They say the answer is C but I am pretty sure it is A.
A job order cost system uses a predetermined factory overhead rate based on expected volume and expected fixed cost. At the end of the year, underapplied overhead might be explained by which of the following situations?
A.Actual volume, greater than expected; Actual fixed costs, greater than expected
B.Actual volume, greater than expected; Actual fixed costs, less than expected
C.Actual volume, less than expected; Actual fixed costs, greater than expected
D.Actual volume, less than expected; Actual fixed costs, less than expected
Heres the explanation:
Underapplied overhead means the actual overhead cost was more than the overhead applied to work-in-process.
A lower production volume than planned could cause this, since the predetermined overhead application rate per unit would apply overhead for fewer units than planned, resulting in underapplied fixed overhead. This is actual production volume less than the expected production volume.
Underapplied overhead could also be caused by spending more for overhead than budgeted. This would be the situation where actual fixed costs are greater than the budgeted fixed costs.
My thinking:
A lower production volume would cause it to be over applied because not as much of the overhead is used if production is lower.
What am I missing here?
.