CA Intermediate · Cost and Management Accounting · Overheads - Absorption Costing Method
Sundaram Fabrics absorbs factory overheads at a predetermined rate of Rs 15 per machine hour. During the year, actual machine hours were 40,000 and actual factory overheads incurred were Rs 6,30,000. What is the position of overheads for the year?
Overheads are under-absorbed by Rs 30,000. Absorbed overhead is 40,000 hours at Rs 15, which is Rs 6,00,000, while actual overhead is Rs 6,30,000. Since the amount charged to production is less than the amount actually spent, the shortfall is under-absorption.
- AUnder-absorbed by Rs 30,000Correct
- BOver-absorbed by Rs 30,000
- CUnder-absorbed by Rs 15,000
- DOver-absorbed by Rs 15,000
Explanation
Overhead absorbed = 40,000 x 15 = Rs 6,00,000. Actual overhead = Rs 6,30,000. Absorbed is less than actual by Rs 30,000, so it is under-absorbed. Over-absorption would arise only if absorbed exceeded actual.
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