The correct answer is: B. Under absorption of overheads
Under absorption of overheads is the amount by which the absorbed overheads fall short of the actual amount of overheads incurred. It occurs when the predetermined overhead rate is too low. This can happen if the estimated activity level is too low or if the actual costs are higher than expected.
Overhead absorption is the process of allocating overhead costs to products or services. This is done by using a predetermined overhead rate, which is calculated by dividing the estimated overhead costs by the estimated activity level. The actual overhead costs are then compared to the absorbed overhead costs. If the absorbed overhead costs are less than the actual overhead costs, then there is under absorption of overheads.
Under absorption of overheads can have a number of negative consequences. It can lead to inaccurate product costing, which can in turn lead to incorrect pricing decisions. It can also lead to a decrease in profitability, as the company will not be able to recover all of its overhead costs.
There are a number of things that companies can do to avoid under absorption of overheads. They can make sure that their estimated activity level is realistic. They can also try to keep their actual costs down. If under absorption of overheads does occur, companies can try to recover the costs by raising prices or by reducing production.