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

Under which of the following situations would a company most appropriately prefer a machine hour rate over a direct labour hour rate for absorbing production overheads?

A machine hour rate is preferred when production is highly automated and overheads such as power, depreciation and repairs depend on machine running time. In labour-intensive operations, a direct labour hour rate better reflects how overheads are incurred.

  1. AProduction is highly automated and overheads mainly arise from machine runningCorrect
  2. BProduction is entirely manual and labour-intensive
  3. COutput units are identical and few in number
  4. DWages form the largest cost of every department

Explanation

Machine hour rate is suitable where machines dominate production and overheads such as power, depreciation and maintenance vary with machine running. Manual or labour-intensive settings point to labour hour rate instead.

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