ACCA Applied Knowledge · Management Accounting · Absorption and marginal costing
Harlow Ltd budgets fixed production overheads of $240,000 and 30,000 direct labour hours for the period. Actual direct labour hours worked were 28,000 and actual fixed production overheads were $251,000. What was the fixed overhead absorbed in the period?
Fixed overhead absorbed is $224,000. The predetermined rate is budgeted overhead of $240,000 divided by budgeted 30,000 hours, giving $8 per hour, which is then multiplied by the actual 28,000 hours worked. Absorption uses actual activity, not actual cost.
- A$224,000Correct
- B$240,000
- C$251,000
- D$256,667
Explanation
The absorption rate is $240,000 / 30,000 = $8 per direct labour hour. Overhead absorbed is based on actual hours: 28,000 x $8 = $224,000. $240,000 wrongly uses the budget amount, and $251,000 wrongly uses actual overhead cost.
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