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Under/over absorption

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Under/over absorption

  • This topic has 1 reply, 2 voices, and was last updated 8 years ago by John Moffat.
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  • Author
    Posts
  • February 9, 2017 at 4:45 am #371696
    geokcheng
    Member
    • Topics: 17
    • Replies: 12
    • ☆

    Good day Sir,

    A company uses a blanket overhead absorption rate $5 per direct labour hour. Actual overhead expenditure in a period was as budgeted.
    The under/over absorbed overhead account for the period have the following entries:

    DR production overhead -$4,000
    CR P&L – $4000

    Which of the following statement is true?
    A. Actual direct labour hours were 800 less than budgeted
    B. Actual direct labour hours were 800 more than budgeted
    C. Actual direct labour hours were 4,000 less than budgeted
    D. Production overhead was over absorbed by $4,000

    The correct answer is A.
    The debit to the profit or loss account implies that overheads were under absorbed. We are told that actual overhead expenditure was in line with budget, so the only cause of the under absorption has to be actual activity being less than budgeted. A shortfall of 800 direct hours would lead to an under absorption of 800 direct labour hours x $5 per hour =$4,000

    Above is the explanation for the answer, but I dun understand.
    1) why the p&l in the answer is debit, the question is credit
    2) Under absorption not should be actual more than budgeted? why the answer mentioned that actual activity less than budgeted?
    3) Why shortfall of 800 direct labour hour will lead to an under absorption

    February 9, 2017 at 6:19 am #371704
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    The amount absorbed is always the actual hours multiplied by the standard absorption rate.

    The under or over absorption is the difference between the amount absorbed and the actual total overheads.

    Since they under-absorbed, the amount absorbed was less than the actual total and therefore they must have worked fewer hours.

    I suggest that you watch my free lectures on marginal and absorption costing. The lectures are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well.

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    Posts
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  • The topic ‘Under/over absorption’ is closed to new replies.

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