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

Narmada Plastics budgets factory overheads of Rs 6,00,000 and 40,000 machine hours for the year. Actual overheads were Rs 6,30,000 and actual machine hours were 42,000. Overheads are absorbed on machine hours at the budgeted rate. What is the amount of overheads under/over-absorbed?

Overheads are fully absorbed, with no under or over-absorption. The budgeted rate is Rs 15 per machine hour, and 42,000 actual hours absorb Rs 6,30,000, which equals the actual overheads incurred. Comparing actual cost with the budget would wrongly show a difference.

  1. ARs 30,000 under-absorbed
  2. BRs 30,000 over-absorbed
  3. CRs 0, fully absorbedCorrect
  4. DRs 15,000 over-absorbed

Explanation

Budgeted rate = 6,00,000/40,000 = Rs 15 per hour. Absorbed = 42,000 x 15 = Rs 6,30,000. Actual = Rs 6,30,000, so the difference is nil. Rs 30,000 under-absorbed results from comparing actual cost with budgeted cost and ignoring higher hours.

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