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ACCA Applied Knowledge · Management Accounting · Absorption and marginal costing

Which of the following is the most likely reason for under-absorbed fixed production overhead in a period?

Under-absorption most likely arises when actual activity is lower than budgeted while overhead spending is as budgeted. The predetermined rate is applied to fewer hours or units, so the amount absorbed is less than the overhead actually incurred.

  1. AActual activity was higher than budgeted activity with overheads as budgeted
  2. BActual overhead expenditure was lower than budgeted with activity as budgeted
  3. CActual activity was lower than budgeted activity with overheads as budgetedCorrect
  4. DThe absorption rate was set using actual overheads

Explanation

Absorbed overhead equals the predetermined rate times actual activity. If actual activity is below budget while spending is as budgeted, absorbed overhead falls short of actual cost, giving under-absorption. The first two options would cause over-absorption.

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