CA Intermediate · Cost and Management Accounting · Overheads - Absorption Costing Method
A factory's machine shop budgeted overheads of Rs 4,80,000 for the year and 24,000 machine hours. Actual overheads were Rs 5,10,000 and actual machine hours were 25,000. Using a predetermined machine hour rate, what is the overhead absorbed by the machine shop?
Overhead absorbed is Rs 5,00,000. The predetermined rate is budgeted overheads divided by budgeted machine hours, which is Rs 20 per hour, and this is applied to the actual 25,000 hours worked. Actual overhead incurred does not affect the amount absorbed.
- ARs 4,80,000
- BRs 5,00,000Correct
- CRs 5,10,000
- DRs 5,25,000
Explanation
Predetermined rate = 4,80,000 / 24,000 = Rs 20 per machine hour. Absorbed = 25,000 x 20 = Rs 5,00,000. Rs 5,10,000 is wrong because it is actual overhead, not absorbed overhead, and Rs 4,80,000 uses the budgeted total.
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