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ACCA Applied Knowledge · Management Accounting · Accounting for material, labour and overheads

Kestrel Ltd absorbs production overheads on a direct labour hour basis. Budgeted overheads were $180,000 and budgeted labour hours 30,000. Actual overheads were $186,000 and actual labour hours 29,000. What was the overhead under- or over-absorption for the period?

Overhead was under-absorbed by $12,000. The rate of $6 per labour hour applied to 29,000 actual hours absorbs $174,000, while actual overhead incurred was $186,000. Since less was absorbed than incurred, the shortfall is an under-absorption.

  1. AUnder-absorbed by $12,000Correct
  2. BOver-absorbed by $12,000
  3. CUnder-absorbed by $6,000
  4. DOver-absorbed by $6,000

Explanation

Rate = $180,000 / 30,000 = $6 per hour. Absorbed = 29,000 x $6 = $174,000. Actual overhead $186,000 exceeds this by $12,000, so overhead is under-absorbed. $6,000 is only the difference between budget and actual spend.

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