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CA Intermediate · Cost and Management Accounting · Overheads - Absorption Costing Method

A firm's budgeted factory overhead is ₹9,00,000 and budgeted machine hours are 30,000. During the year, actual overhead was ₹9,60,000 and actual machine hours were 32,000. Under which treatment would the under/over absorbed overhead be most appropriately handled if the amount is small and arises from normal estimating differences?

A small difference from normal estimating variation is written off to the Costing Profit and Loss Account. Here the rate is ₹30 per hour and absorbed overhead of ₹9,60,000 equals actual, so no difference even arises. Deferring or loading it to later jobs would distort their costs.

  1. AWritten off to Costing Profit and Loss AccountCorrect
  2. BCarried forward to the next year as a deferred asset
  3. CCharged only to closing finished goods
  4. DAdded to the cost of the next production batch

Explanation

Rate = 9,00,000/30,000 = ₹30 per hour. Absorbed = 32,000 × 30 = ₹9,60,000, equal to actual, so there is no under or over absorption here. In any case, a small normal difference is written off to the Costing Profit and Loss Account; carrying forward or loading to later batches distorts future costs.

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