Question

10) At the beginning of the year, Lucy company estimated that the total annual fixed overhead costs would amount to $25,000. Further, Lucy estimated that its volume of production would be 2,000 units of product. Based on these estimates, Lucy computed a predetermined overhead rate that was used to allocate overhead costs to the products made during the year. As predicted, actual fixed overhead costs did amount to $25,000. However, actual volume of production amounted to 2,200 units of product. Based on this information alone: A. Products were overcosted during the year. B. Products were undercosted during the year. C. Products were costed accurately during the year. D. The answer cannot be determined from the information provided.

Answer 1

Answer: A. Products were overcosted during the year.

Explanation:

At the budgeted figures of $25,000 fixed overhead costs and the 2,000 units of production, the predetermined fixed overhead rate is:

= 25,000 / 2,000

= $12.50 per unit

However, the company then produces 2,200 units at the same cost of $25,000 making the actual predetermined fixed overhead rate:

= 25,000 / 2,200

= $11.36 per unit

The actual rate is less than the predetermined rate which means that the products had originally be overcosted by being apportioned higher expenses.