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

Gupta Engineering absorbs factory overheads at ₹12 per direct labour hour. Budgeted overheads were ₹6,00,000 for 50,000 direct labour hours. Actual overheads were ₹5,70,000 and actual direct labour hours were 46,000. What is the position of overheads?

Overheads absorbed are 46,000 hours at ₹12, which is ₹5,52,000, against actual overheads of ₹5,70,000. Absorption is lower than actual cost, so overheads are under-absorbed by ₹18,000. Comparing actual with budgeted overheads does not measure absorption.

  1. AUnder-absorbed by ₹18,000Correct
  2. BOver-absorbed by ₹18,000
  3. CUnder-absorbed by ₹30,000
  4. DOver-absorbed by ₹30,000

Explanation

Absorbed overhead = 46,000 × 12 = ₹5,52,000. Actual overhead = ₹5,70,000. Absorbed is less than actual, so under-absorbed by 5,70,000 − 5,52,000 = ₹18,000. Comparing actual with budget (₹30,000 lower) is the wrong base and gives a false over-absorption.

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