CA Intermediate · Cost and Management Accounting · Overheads - Absorption Costing Method
Ganga Engineering absorbs overheads at 120% of direct wages. Budgeted overheads were Rs 12,00,000 and actual direct wages were Rs 11,00,000, while actual overheads were Rs 13,50,000. Which statement is correct?
Overheads are under-absorbed by Rs 30,000. At 120% of actual direct wages of Rs 11,00,000, the amount absorbed is Rs 13,20,000, which is less than the actual overheads of Rs 13,50,000. Comparing with budget instead would be wrong.
- AOverheads under-absorbed by Rs 30,000Correct
- BOverheads over-absorbed by Rs 30,000
- COverheads under-absorbed by Rs 1,50,000
- DOverheads over-absorbed by Rs 1,50,000
Explanation
Absorbed = 120% x 11,00,000 = Rs 13,20,000. Actual = Rs 13,50,000. Shortfall = Rs 30,000, so under-absorbed. Rs 1,50,000 arises by comparing actual with budgeted overheads, which is the wrong comparison.
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