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

Budgeted overheads for a department were $270,000 based on 45,000 direct labour hours. Actual overheads were $281,000 and actual hours were 44,000. Which statement is correct?

The absorption rate is $6 per labour hour from the budget. Actual hours of 44,000 absorb $264,000, while actual overheads were $281,000. The shortfall means overheads were under-absorbed by $17,000, caused by higher spending and lower activity than budgeted.

  1. AOverheads were under-absorbed by $17,000Correct
  2. BOverheads were under-absorbed by $11,000
  3. COverheads were over-absorbed by $17,000
  4. DOverheads were under-absorbed by $6,000

Explanation

Rate = $270,000 / 45,000 = $6 per hour. Absorbed = 44,000 x $6 = $264,000. Actual $281,000 - $264,000 = $17,000 under-absorbed. The $11,000 figure compares actual with budget only.

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