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CMA Intermediate · Cost Accounting · Cost Book-Keeping

Gupta Industries uses non-integrated accounts. Factory overheads incurred during the period were Rs 4,60,000. Overheads absorbed into production using a predetermined rate were Rs 4,20,000. How should the Rs 40,000 difference be described and treated in the cost ledgers?

It is under-absorption of Rs 40,000, because actual overheads exceed absorbed overheads. The debit balance in Overhead Control is cleared by crediting Overhead Control and debiting Costing Profit and Loss Account, treating it as a loss for the period.

  1. AOver-absorption; credit to Overhead Control A/c and transfer to Costing P&L A/c
  2. BUnder-absorption; debit to Costing P&L A/c and credit to Overhead Control A/cCorrect
  3. CUnder-absorption; credit to Costing P&L A/c and debit to Overhead Control A/c
  4. DOver-absorption; debit to Costing P&L A/c and credit to Overhead Control A/c

Explanation

Actual overheads of Rs 4,60,000 exceed absorbed overheads of Rs 4,20,000, so Rs 40,000 is under-absorbed. Overhead Control has a debit balance of Rs 40,000 (actual debited, absorbed credited). Closing it transfers the amount by crediting Overhead Control and debiting Costing P&L as a loss. Options A and D mislabel it as over-absorption.

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