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

Sharma Components Ltd. budgeted factory overheads of Rs 6,00,000 for the year and 40,000 machine hours. Actual factory overheads were Rs 6,30,000 and actual machine hours were 42,000. Overheads are absorbed on a machine hour basis. What is the amount of overhead under-absorbed or over-absorbed?

Overheads are fully absorbed with no difference. The rate is Rs 15 per machine hour, and 42,000 actual hours absorb Rs 6,30,000, exactly equal to actual overheads. Comparing actual with budgeted overhead would wrongly show Rs 30,000 under-absorption.

  1. AUnder-absorbed by Rs 30,000
  2. BOver-absorbed by Rs 30,000
  3. CFully absorbed with no differenceCorrect
  4. DOver-absorbed by Rs 12,000

Explanation

Rate = 6,00,000/40,000 = Rs 15 per hour. Absorbed = 42,000 x 15 = Rs 6,30,000. Actual overhead is Rs 6,30,000, so the difference is nil. Comparing actual with budgeted overhead (Rs 30,000 higher) wrongly suggests under-absorption.

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