Danforth Manufacturing Company uses a cost-plus pricing strategy.At the beginning of the year,Danforth estimated that total annual fixed overhead costs would amount to $60,000.Further,Danforth estimated that the annual volume of production would be 1,000 units of product.Based on these estimates,Danforth computed a predetermined overhead rate that was used to allocate overhead cost to the products made throughout the year.As predicted,the actual volume of production amounted to 1,000 units of product.However,actual fixed overhead costs amounted to $56,000.Based on this information alone:
A) a lower than appropriate selling price was assigned to products during the year.
B) a higher than appropriate selling price was assigned to products during the year.
C) the correct selling price was assigned to products during the year.
D) the answer cannot be determined from the information provided.

Question

Quizplus · Accepted Answer

Since actual fixed overhead costs were lower than the estimated amount used to compute the predetermined overhead rate, the products were allocated a higher overhead cost than they actually incurred. This means that a higher selling price was assigned to the products than was necessary to cover their cost, resulting in a higher than appropriate selling price.

Danforth Manufacturing Company Uses a Cost-Plus Pricing Strategy