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ACCA Applied Knowledge · Management Accounting · Absorption and marginal costing

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

Actual overhead expenditure being higher than budgeted while activity is as budgeted causes under-absorption. Absorbed overhead then equals the budgeted amount, which is less than the higher actual spending, so the actual overhead exceeds the amount absorbed into production.

  1. AActual overhead expenditure was lower than budgeted, with actual activity as budgeted
  2. BActual activity was higher than budgeted, with actual overhead expenditure as budgeted
  3. CActual overhead expenditure was higher than budgeted, with actual activity as budgetedCorrect
  4. DActual overhead expenditure and actual activity were both 10% below budget

Explanation

Under-absorption occurs when actual overheads exceed absorbed overheads. With activity as budgeted, absorbed equals budgeted overhead, so higher actual expenditure gives under-absorption. Option 1 and 2 give over-absorption, and option 4 with proportionate falls on a wholly variable basis would not be certain, but with fixed overhead it would be under-absorbed; here the clear single cause is option 3.

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