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

Kaveri Tools budgets factory overheads of ₹6,48,000 and 54,000 machine hours for the year. Actual overheads were ₹6,60,000 and actual machine hours were 52,000. What is the amount of overheads under-absorbed or over-absorbed?

Overheads are under-absorbed by ₹36,000. The budgeted rate is ₹12 per machine hour, so 52,000 actual hours absorb ₹6,24,000, which is less than the actual overheads of ₹6,60,000.

  1. AUnder-absorbed by ₹36,000Correct
  2. BOver-absorbed by ₹12,000
  3. CUnder-absorbed by ₹12,000
  4. DOver-absorbed by ₹36,000

Explanation

Rate = 6,48,000/54,000 = ₹12 per machine hour. Absorbed = 52,000 × 12 = ₹6,24,000. Actual = ₹6,60,000. Difference = ₹36,000 under-absorbed. Using budgeted overheads instead of absorbed amount (6,60,000 - 6,48,000 = 12,000) would be the wrong base.

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