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ACCA Applied Knowledge · Management Accounting · Accounting for material, labour and overheads

Which of the following would most likely cause overheads to be under-absorbed in a period?

Under-absorption occurs when overhead absorbed is less than overhead incurred. If activity falls below budget while fixed overheads stay at the budgeted amount, fewer overheads are charged to production using the predetermined rate than were actually incurred, leaving a shortfall.

  1. AActual activity was lower than budgeted while fixed overheads were incurred as budgetedCorrect
  2. BActual activity was higher than budgeted while overheads were as budgeted
  3. CActual overheads were lower than budgeted with activity as budgeted
  4. DThe absorption rate was set using a higher budgeted overhead than was later incurred

Explanation

With fixed overheads as budgeted but fewer hours or units than planned, less overhead is absorbed than incurred, giving under-absorption. Options B, C and D each lead to over-absorption.

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