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ACCA Applied Knowledge · Management Accounting · Accounting for material, labour and overheads

A factory has two production departments, Cutting and Finishing. Annual budgeted overheads for Cutting are $84,000 and the budgeted machine hours are 12,000. Cutting uses a machine-hour absorption rate. During the year, Cutting works 12,500 machine hours. What amount of overheads is absorbed into production in Cutting?

The overhead absorbed is $87,500. The predetermined rate is $84,000 divided by 12,000 budgeted machine hours, giving $7 per hour, and this is applied to the 12,500 actual hours worked. Using budgeted overhead alone ignores the extra hours actually worked.

  1. A$84,000
  2. B$87,500Correct
  3. C$80,640
  4. D$90,000

Explanation

The rate is $84,000 / 12,000 = $7 per machine hour. Absorbed overhead is based on actual hours: 12,500 x $7 = $87,500. $84,000 uses budgeted hours instead of actual hours, so it is wrong.

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