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

Which of the following is the correct treatment when under-absorbed overhead arises due to abnormal factors such as a prolonged strike or machine breakdown, as per cost accounting principles at Intermediate level?

Under-absorption arising from abnormal causes like a long strike or breakdown is charged to the Costing Profit and Loss Account. It is not a normal production cost, so it should not be loaded onto inventory or carried forward; supplementary rates apply only to normal causes.

  1. ACarry forward to next period as a deferred cost
  2. BCharge to Costing Profit and Loss AccountCorrect
  3. CAdd to cost of work-in-progress and finished goods only
  4. DUse supplementary rate on closing stock and cost of sales

Explanation

Under-absorption caused by abnormal reasons is not a normal cost of production, so it is written off to the Costing Profit and Loss Account. Supplementary rates are used for under-absorption due to normal causes such as error in estimation. Carrying it forward would inflate future costs.

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