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

Kaveri Industries absorbs factory overheads at ₹12 per direct labour hour. Budgeted overheads were ₹6,00,000 and actual overheads incurred were ₹5,70,000. Actual direct labour hours worked were 46,000. What is the amount of overheads under- or over-absorbed?

Overheads are under-absorbed by ₹18,000. Absorbed overhead is 46,000 hours at ₹12, which is ₹5,52,000, while actual overhead incurred is ₹5,70,000. Since absorption is less than the actual cost, the shortfall of ₹18,000 is under-absorption.

  1. AUnder-absorbed by ₹18,000
  2. BOver-absorbed by ₹18,000Correct
  3. COver-absorbed by ₹30,000
  4. DUnder-absorbed by ₹30,000

Explanation

Absorbed = 46,000 × 12 = ₹5,52,000. Actual = ₹5,70,000. Absorbed is lower than actual, so under-absorbed by ₹18,000. Recheck: 5,70,000 − 5,52,000 = 18,000 under-absorbed. So the correct choice is under-absorbed by ₹18,000.

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