ACCA Applied Knowledge · Management Accounting · Accounting for material, labour and overheads
A company absorbs production overheads at a rate of $8 per machine hour. Budgeted overheads were $480,000 and actual overheads were $495,000. Actual machine hours were 61,000. What was the over- or under-absorption of overheads?
Overheads absorbed were 61,000 hours at $8, which is $488,000. Actual overheads were $495,000, so the business absorbed less than it incurred. This leaves $7,000 under-absorbed, because absorption is based on actual activity multiplied by the predetermined rate.
- A$7,000 under-absorbedCorrect
- B$7,000 over-absorbed
- C$15,000 under-absorbed
- D$15,000 over-absorbed
Explanation
Absorbed overheads = 61,000 x $8 = $488,000. Actual overheads were $495,000, so $495,000 - $488,000 = $7,000 under-absorbed. Using the budget figure of $480,000 and comparing to actual of $495,000 gives $15,000 under, which ignores the actual hours worked.
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