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CMA Foundation · Fundamentals of Financial and Cost Accounting · Cost, Cost Centre, Cost Unit and Cost Drivers

A firm's total overhead of Rs 2,40,000 is traditionally absorbed on 4,000 direct labour hours. Under this method, a job using 50 direct labour hours is charged overhead of:

The job is charged Rs 3,000. The traditional absorption rate is Rs 2,40,000 divided by 4,000 direct labour hours, which equals Rs 60 per hour, and the job uses 50 hours, so overhead is 50 times 60.

  1. ARs 2,400
  2. BRs 3,000Correct
  3. CRs 4,800
  4. DRs 6,000

Explanation

The rate is 2,40,000 / 4,000 = Rs 60 per direct labour hour. The job is charged 50 x 60 = Rs 3,000. Rs 2,400 results from wrongly using a rate of Rs 48.

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