Manufacturing Overhead Is Applied to Production

question 74

Essay

Manufacturing overhead is applied to production.
A. Describe several situations that may give rise to underapplied overhead.
B. Assume that underapplied manufacturing overhead is treated as an adjustment to Cost of Goods Sold. Explain why an underapplication of overhead increases Cost of Goods Sold.

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Definitions:

Break-even Sales

The amount of revenue from sales that exactly covers fixed and variable costs, resulting in neither profit nor loss.

Fixed Costs

Expenses that do not change with the level of output or production, such as rent, salaries, and insurance premiums.

Break-even Point

The point at which total costs equal total revenues, indicating that a business is neither making a profit nor a loss.

Fixed Costs

Costs that do not change in total with changes in activity level over a relevant range, such as rents, salaries, and insurance premiums.