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    Question

    Refer to the following information to answer the next 4 questions (Q15 to Q18) Overheads are indirect costs that cannot be directly traced to specific products or services but are necessary for the overall operations of a business. These costs include various types of expenses such as administration, production, selling, and distribution overheads. Each category of overheads plays a distinct role in the functioning of a business. Accurate classification and allocation of these overheads are crucial for effective cost accounting, enabling businesses to determine the true cost of their products and services and make informed financial decisions. Understanding how to allocate and manage these overheads helps in analyzing the profitability and efficiency of different segments of the business, ensuring better financial control and strategic planning. The process of cost allocation involves assigning costs to cost centers or cost units, ensuring that each segment of the business is charged with its relevant expenses. This helps in analyzing the profitability and efficiency of different segments of the business, ensuring better financial control and strategic planning. Overheads also impact financial accounting, as adjustments for under-absorption or over-absorption need to be made to reflect the actual costs incurred. Understanding how to manage these overheads aids in financial analysis, budgeting, and forecasting, ultimately contributing to the overall financial health and sustainability of the business.

     In the context of cost accounting, overheads refer to indirect costs that are allocated to cost units or cost centres. The process of absorbing overheads involves applying a predetermined overhead rate to allocate these costs. When the actual overheads are more than the absorbed overheads. It is called _______

    A Over absorption Correct Answer Incorrect Answer
    B Under absorption Correct Answer Incorrect Answer
    C Capacity cost Correct Answer Incorrect Answer
    D None of these Correct Answer Incorrect Answer
    E All of the above Correct Answer Incorrect Answer

    Solution

    Under absorption occurs when the actual overhead costs are greater than the overhead costs that have been allocated or absorbed. This indicates that the overhead absorption rate was set too low, resulting in a shortfall that needs to be accounted for in the financial statements.

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