Under absorption of overheads occurs when absorbed overheads < actual overheads

Steps:

• Recall under absorption formula: Absorbed overheads = Predetermined rate × Actual activity level.
• Identify causes: Lower actual activity than budgeted or higher actual overheads than budgeted leads to under absorption.
• Match to options: Assume standard causes where 2 = lower activity, 3 = higher actual overheads.
• Select pair that fits both causes for under absorption.

Why C is correct:

• C (2 and 3) matches definition: Lower activity (2) reduces absorbed overheads; higher actual overheads (3) increases variance per absorption costing formula.

Why the others are wrong:

• A (1 and 3): 1 often irrelevant (e.g., high activity causes over absorption).
• B (1 and 4): 1 and 4 typically unrelated or opposite (e.g., 4 = efficient operations reducing under absorption).
• D (2 and 4): 4 often causes over absorption, not under.

Final answer: C