Topic 21: Normal Job Costing (Pt 2)

Question 1

Note:

However If the company sets its selling price based on a mark-up on cost, over-applied overheads will lead to overstated costs and in turn higher prices charged to customers, which may erode the competitiveness of its products, leading to less sales and profits.

On the other hand, under-applied overheads will lead to understated cost and understated selling prices, which may mean that the company is not maximising its profits or is unable to cover its total production costs and risk making a loss.