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CA Intermediate · Cost and Management Accounting · Cost Accounting Systems

Under an integrated system, Gupta Engineering Ltd. records: raw materials purchased on credit Rs 6,00,000; materials issued to production Rs 4,50,000 (of which Rs 50,000 is indirect); wages paid Rs 2,00,000 (direct 75%, indirect 25%); factory overheads actually incurred (other than indirect material and wages) Rs 1,20,000, paid in cash. Overheads are absorbed at 100% of direct wages. What is the amount of under- or over-absorbed overhead for the period?

Actual factory overhead is Rs 2,20,000 (indirect material 50,000, indirect wages 50,000, other 1,20,000), while absorbed overhead is Rs 1,50,000 (100% of direct wages). The shortfall is Rs 70,000, so overhead is under-absorbed by Rs 70,000.

  1. AOver-absorbed Rs 30,000
  2. BUnder-absorbed Rs 20,000Correct
  3. CUnder-absorbed Rs 70,000
  4. DOver-absorbed Rs 1,20,000

Explanation

Actual overhead = indirect material 50,000 + indirect wages 50,000 + other 1,20,000 = 2,20,000. Direct wages = 75% of 2,00,000 = 1,50,000; absorbed at 100% = 1,50,000. Difference 2,20,000 - 1,50,000 = 70,000 under-absorbed. So the option Rs 20,000 is incorrect and Rs 70,000 is correct.

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