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Job 1 absorbs $38,220 under a single rate, $38,625 under departmental rates and $37,500 under activity based costing. What do the first two methods do to Job 1?
AThey understate the overhead applied to Job 1
BThey leave the overhead applied to Job 1 alone
CThey remove the overhead applied to Job 1
DThey overstate the overhead applied to Job 1
Answer & Solution
Correct answer: D. They overstate the overhead applied to Job 1
1. Activity based costing charges Job 1 with $37,500, the most specific of the three estimates.
2. The single rate charges $38,220 and departmental rates charge $38,625, both above $37,500.
3. Charging more than the activity analysis supports overstates Job 1.
4. Because the total pool of $54,600 is fixed, the same two methods understate Job 2 by the matching amount.
5. Overstating a job's cost distorts any selling price built from that cost.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 4.5 Differences Based on Factory Overhead Method_
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