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

Kaveri Engineering Ltd. budgeted factory overheads of ₹6,00,000 for the year and 40,000 machine hours. Actual overheads were ₹6,30,000 and actual machine hours worked were 42,000. What is the amount of under/over-absorption of overheads?

There is neither under- nor over-absorption. The predetermined rate is ₹15 per machine hour (6,00,000 ÷ 40,000), so overhead absorbed on 42,000 actual hours is ₹6,30,000, which exactly equals the actual overheads of ₹6,30,000, leaving no difference.

  1. AOver-absorbed by ₹30,000
  2. BUnder-absorbed by ₹30,000
  3. CUnder-absorbed by ₹10,000
  4. DNeither under- nor over-absorbedCorrect

Explanation

Predetermined rate = 6,00,000 / 40,000 = ₹15 per machine hour. Absorbed = 42,000 × 15 = ₹6,30,000. Actual = ₹6,30,000, so the difference is nil. The option of ₹30,000 under-absorbed arises from wrongly comparing actual with budget.

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