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Question: A company uses absorption costing with a predetermined hourly fixed overhead rate.
The following situations arose last year. Would each of these situations cause overheads to be under absorbed or over absorbed?Actual hours worked were less than the budgeted hours used to set the predetermined overhead absorption rate
Answer: Under absorbed (ACCA practice tests)—–
My question: Don’t we need we need to have the overhead absorbed to justify the answer above. We need the o/h absorbed and compare that with the actual o/h to see whether it was under or over. However, the question above does not give any amounts absorbed.
Cant you also have a situation where it could be over absorbed, since actual amounts incurred are independent of the OAR formula | ?
The answer is correct.
It is easier for me to explain with an example.
Suppose the budgeted overheads are $100,000 and the budgeted hours were 20,000.
So…the overhead absorption rate is $5 per hour.We will therefore charge (absorb) $5 for every hour actually worked.
Suppose the actual hours worked at 18,000 (less than budgeted. as per the question), then the overheads absorbed will be 18,000 x $5 = $90,000.
This is less than the budgeted overheads of $100,000 and therefore overheads are under-absorbed.(What could happen of course is that the actual total overheads could be different from the budgeted figure. However since there is no mention of this we assume that budgeted total remains at 100,000 in my example, which of course it should do by definition anyway)
What if the question was:
A company uses absorption costing with a predetermined hourly fixed overhead rate.
The following situations arose last year. Would each of these situations cause overheads to be under absorbed or over absorbed?Actual overhead expenditure was less than the budgeted expenditure
Over absorbed
(acca)
—My quest:
Does that mean in the question above,we need to assume the budgeted hrs = actual hrs?
No we cannot assume that (and that question could not be asked without more information being given).
The answer given by acca is
Where the actual overhead is less than budget then the overhead will be over absorbed because the absorption rate is based on a higher value of overhead.
..which I don’t understand
It depends what the other choices were.
The reason I say that is that if the actual overhead is less than budget, then the overhead COULD be over-absorbed, but it will not necessarily be over-absorbed. Whether it is over or under absorbed depends how many hours were actually worked and how many hours were budgeted.
If, for example, the actual hours worked were equal to the budgeted hours, then the total overheads absorbed will be equal to the total budgeted overheads. If the actual total is less than budget, then the overheads will have been over-absorbed.
A factory consists of two production cost centres (A and B) and two service cost centres (X and Y). The total
allocated and apportioned overhead for each is as follows:
A B X Y
$12,000 $17,000 $9,500 $8,000It has been estimated that each service cost centre does work for other cost centres in the following proportions:
A B X Y
Percentage of service cost centre X to 60 40 – –
Percentage of service cost centre Y to 35 35 30 –
The reapportionment of service cost centre costs to other cost centres fully reflects the above proportions.After the reapportionment of service cost centre costs has been carried out, what is the total over-
head for production cost centre A?sir i am unable to solv this math..
please help meFirst apportion Y
So 35% x 8,000 = 2,800 goes to each of A and B, and 30% x 8,000 = 2,400 going to X.The total for X is now 9,500 + 2,400 = 11,900.
Reapportion X, so 60% x 11,900 = 7,140 goes to A.So the final total for A is 12,000 + 2,800 + 7,140
rent:2000
rates:1000
plant insurance:1000
plant depreciation:10000
supervisor’s salary:7000
———–
total : 21000
department A department B department C
area 3800 3500 700
value of machinery($000) 210 110 80
number of employee 34 16 20the total budgeted monthly fixed overhead cost for department C is:
Sir i am unable to solve that math.Please help me.
The rent and the rates will be apportioned based on the area. The total area of all three departments is 8000, and so the amount apportioned to C will be 700/8000 x (2000+1000).
The plant insurance and the plant depreciation will be apportioned based on the total value of the machinery. The total value of the machinery is 400, and so the amount apportioned to C will be 80/400 x (1000+10000).
The supervisors salary will be apportioned based on the number of employees. The total number of employees is 70, and so the amount apportioned to C will be 20/70 x 7,000.
I hope that helps 🙂
(Incidentally, I doubt that ‘rates’ would be mentioned in the real exam because it is very much a UK term. However, if it is then rates are always treated in the same way as rent.)
department S T
allocated or apportioned fixed overhead $60,000 $100,000
total cost of direct materials used $120,000 $100,000
total productive labour hours 5000 10,000a particular product ha the following variable cost.
Materials
department S 3 kg @ 4 per kg $12
department T 2 kg @ 4 per kg $8
Labour
department S 1/2 hour @10 per hour $5
department T 1and 1/2 @10 per hour $15
variable overheads 1 hour @5 per hour $5
———————— ———
total 45if fixed overheads are absorbds on the basis of departmental material cost, the fixed overhead cost per unit is:
Sir i am unable to solve that math.Help me sir..
Did you receive my reply to your previous question?
You did not acknowledge it!!!!For this question, you know the total fixed overheads. Also, you can calculate the total cost of direct materials. So you can then calculate the fixed overheads per $ of direct materials (by dividing the total fixed overheads by the total materials cost).
The you should have no problem calculating the fixed overheads per unit.
Presumably the book in which you found this question also has the answer – it would be better if you said which part of the answer you do not understand.
Also, have you watched the free lecture on this website on overhead allocation and absorption?
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