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CA Intermediate · Cost and Management Accounting · Cost Accounting Systems

Under non-integrated accounting, Kavya Industries records: materials purchased Rs 3,00,000; materials issued to production Rs 2,40,000, of which Rs 15,000 was indirect; wages paid Rs 1,20,000 (direct Rs 90,000); factory overhead incurred Rs 80,000 including the indirect material and indirect wages; overhead absorbed Rs 1,00,000. Opening balances were nil. What is the balance of Factory Overhead Control Account after absorption, and what does it indicate?

The Factory Overhead Control Account shows a credit balance of Rs 20,000, indicating over-absorption. Actual overhead incurred is Rs 80,000, which already includes indirect material and wages, while Rs 1,00,000 was absorbed into production, so absorption exceeds actual cost by Rs 20,000.

  1. ARs 20,000 debit, under-absorption
  2. BRs 30,000 credit, over-absorption
  3. CRs 20,000 credit, over-absorptionCorrect
  4. DRs 5,000 credit, over-absorption

Explanation

Factory overhead incurred (total) is Rs 80,000 as stated, already including the indirect material and indirect wages. Absorbed overhead is Rs 1,00,000 credited to the control account. Balance = 1,00,000 - 80,000 = Rs 20,000 credit, i.e. over-absorption. Adding the indirect material and wages again (15,000 + 30,000) to 80,000 would double count and give Rs 30,000 or Rs 5,000 style errors.

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