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

In cost accounting, the process of charging overheads to cost units on a predetermined basis, rather than on actual expenditure incurred, is described by which of the following outcomes when the absorbed amount is less than the actual overhead incurred?

The shortfall is called under-absorption of overheads. It arises when overheads charged to production at the predetermined rate are less than the actual overheads incurred. Over-absorption is the reverse, while allocation and apportionment concern distributing costs to departments rather than comparing absorbed and actual amounts.

  1. AOver-absorption of overheads
  2. BUnder-absorption of overheadsCorrect
  3. CApportionment of overheads
  4. DAllocation of overheads

Explanation

When overheads absorbed into production are lower than the actual overheads incurred, the shortfall is called under-absorption. Over-absorption is the opposite case, where absorbed exceeds actual. Allocation and apportionment relate to assigning overheads to departments, not to comparing absorbed with actual.

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