CA Intermediate · Cost and Management Accounting · Overheads - Absorption Costing Method
Kaveri Textiles absorbs production overheads on machine hours. Budgeted overheads are Rs 6,00,000 for 30,000 machine hours. Actual overheads were Rs 6,30,000 and actual machine hours were 28,000. What is the amount of overhead under- or over-absorbed?
Overheads are under-absorbed by Rs 70,000. The predetermined rate is Rs 20 per machine hour, so 28,000 actual hours absorb Rs 5,60,000, which is Rs 70,000 less than the actual overhead of Rs 6,30,000 incurred.
- AUnder-absorbed Rs 70,000Correct
- BOver-absorbed Rs 70,000
- CUnder-absorbed Rs 30,000
- DOver-absorbed Rs 30,000
Explanation
Rate = 6,00,000 / 30,000 = Rs 20 per machine hour. Absorbed = 28,000 x 20 = Rs 5,60,000. Actual = Rs 6,30,000, so under-absorbed by Rs 70,000. Rs 30,000 is wrong because it is only the budget-versus-actual spending difference.
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