Which of the following statements about predetermined overhead absorption rates are true? (1) Using a predetermined absorption rate avoids fluctuations in unit costs caused by abnormally high or low overhead expenditure or activity levels. (2) Using a predetermined absorption rate offers the administrative convenience of being able to record full production costs sooner. (3) Using a predetermined absorption rate avoids problems of under/over absorption of overheads because a constant overheadrate is available. (1) and (3) only (2) and (3) only (1) and (2) only (1), (2) and (3)

The correct answer is **(1) and (2) only**.<br /><br />Statement (1) is true because a predetermined overhead rate, calculated in advance based on budgeted overhead costs and activity levels, smooths out variations in unit costs that might arise from unexpected fluctuations in actual overhead costs or production volume during the period.<br /><br />Statement (2) is true because using a predetermined rate allows for the immediate calculation of full production costs (direct costs + absorbed overhead) as soon as the direct costs are known, improving the timeliness of cost accounting information.<br /><br />Statement (3) is false. While a predetermined rate aims to improve cost accuracy, it doesn't eliminate the possibility of under- or over-absorption of overheads. Differences between the budgeted and actual overhead costs and/or activity levels will still lead to variances that need to be accounted for.<br />