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

Gupta Engineering Ltd. budgeted factory overheads of ₹6,00,000 and 40,000 direct labour hours for the year. Actual overheads were ₹6,30,000 and actual labour hours worked were 41,000. What is the amount of over-absorbed or under-absorbed overhead?

The predetermined rate is ₹15 per labour hour. Absorption on 41,000 actual hours is ₹6,15,000, while actual overhead is ₹6,30,000. Since less was absorbed than incurred, overheads are under-absorbed by ₹15,000.

  1. AUnder-absorbed by ₹15,000Correct
  2. BOver-absorbed by ₹15,000
  3. COver-absorbed by ₹30,000
  4. DUnder-absorbed by ₹30,000

Explanation

Rate = 6,00,000 ÷ 40,000 = ₹15 per hour. Absorbed = 41,000 × 15 = ₹6,15,000. Actual = ₹6,30,000. Absorbed is less than actual, so under-absorbed by ₹15,000. Choosing ₹30,000 results from comparing actual with budgeted overhead instead of absorbed overhead.

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