The correct answer is: A. under applied indirect cost
An under allocated indirect cost is also called under applied indirect cost. This is because the indirect costs are not fully allocated to the production units. This can happen when the indirect cost rate is too low or when the actual indirect costs are higher than the estimated indirect costs.
Under applied indirect costs can lead to a number of problems, including:
- Overstating the profit of the company
- Understating the cost of goods sold
- Making it difficult to compare the costs of different products or services
- Making it difficult to set prices
To avoid these problems, it is important to carefully estimate the indirect costs and to use a realistic indirect cost rate.
Option B, under absorbed indirect cost, is incorrect because under absorbed indirect costs are the indirect costs that are not fully absorbed by the production units. This can happen when the production units do not produce enough units or when the indirect cost rate is too high.
Option C, absorbed indirect cost, is incorrect because absorbed indirect costs are the indirect costs that are fully absorbed by the production units. This can happen when the production units produce enough units or when the indirect cost rate is too low.
Option D, both a and b, is incorrect because under applied indirect costs and under absorbed indirect costs are two different things.