ACCA Applied Knowledge · Management Accounting · Absorption and marginal costing
Which of the following is the main reason a business would use a direct labour hour absorption rate rather than a rate per unit of output?
A direct labour hour rate is appropriate when production is labour intensive and products need different amounts of labour time, because overhead is then shared according to the hours each product consumes rather than evenly per unit.
- AProducts are identical and produced in a single process
- BProduction is labour intensive and products take different amounts of labour timeCorrect
- CProduction is highly automated with little labour involved
- DOverheads consist mainly of direct material handling costs
Explanation
A labour hour rate reflects the time each product consumes in a labour-intensive environment, so products using more hours bear more overhead. A per-unit rate suits identical products, and a machine hour rate suits automated production.
Did you get it right without looking?
One question tells you little. A timed set on Absorption and marginal costing shows your real accuracy, how long you take and where you lose marks.
More Absorption and marginal costing questions
- Dunmore Ltd budgeted fixed production overheads of $360,000 and 45,000 units of output, absorbing on a per unit basis. Actual output was 48,…
- Kestrel Ltd produced 12,000 units and sold 10,000 units in a period. There was no opening inventory. Fixed production overhead was $60,000 a…
- Tamsin Ltd had opening inventory of 2,000 units and closing inventory of 5,000 units. Fixed production overhead is absorbed at $6 per unit a…
- Brindle Co absorbs production overheads on a machine hour basis. Budgeted overheads were $450,000 for 90,000 machine hours. Actual overheads…
- Which one of the following would cause overheads to be under-absorbed in a period?
- Harlow Ltd budgets fixed production overheads of $240,000 and 30,000 direct labour hours for the period. Actual direct labour hours worked w…