Skip to content

CMA Intermediate · Cost Accounting · Overheads

Kaveri Ltd. produced 8,000 units. Its factory overhead recovered at Rs 12 per unit was Rs 96,000, while actual factory overhead was Rs 1,08,000. Of the Rs 12,000 under-absorption, Rs 7,000 arose from an abnormal strike and the remainder from underestimation of the rate. The correct treatment is:

The Rs 7,000 from the abnormal strike is written off to the Costing Profit and Loss Account, while the Rs 5,000 from underestimated rate is spread over production and stocks by a supplementary rate.

  1. ACharge the whole Rs 12,000 to the Costing Profit and Loss Account
  2. BCharge Rs 7,000 to Costing Profit and Loss Account and supplement the rate or apportion Rs 5,000 over production and stocksCorrect
  3. CCarry the whole Rs 12,000 forward to the next period
  4. DApportion the whole Rs 12,000 to cost of sales only

Explanation

Under-absorption from abnormal causes (the strike, Rs 7,000) goes to the Costing Profit and Loss Account. The remainder, Rs 12,000 - 7,000 = Rs 5,000, is due to a faulty rate and is dealt with by a supplementary rate across production, stock and cost of sales. Charging all Rs 12,000 to profit and loss ignores this split.

Did you get it right without looking?

One question tells you little. A timed set on Overheads shows your real accuracy, how long you take and where you lose marks.

Practise OverheadsFree diagnostic mock

More Overheads questions