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Q) A cost centre has an OAR of $4.25 per machine hour, based on a budgeted activity level of 12,400 machine hours.
In the period covered by the budget, actual machine hours worked were 2% more than the budgeted hours and the actual O/H expenditure incurred in the cost centre was $56,389.
What was the total over or under absorption of O/H in the cost centre for the period?
A. $1,054 over absorbed
B. $2,635 under absorbed
C. $3,689 over absorbed
D. $3,689 under absorbedI know that we need to subtract absorbed O/H by the actual expenditure ($56,389) but I’m a little confused on how to get the absorbed O/H. A formula I learned in my class for absorbed O/H was Overhead Absorption Rate (OAR) x actual activity, but how do I get the actual activity? Do I just multiply 12,400 by 0.02?
Your answer would help me loads!
The actual hours are 2% more than the budget hours and are therefore 12,400 + (2% x 12,400) = 12,648 hours.
Therefore the total overheads absorbed will be 12,648 x $4.25 = $53,754.
Therefore there is an under absorption of 56,389 – 53,754 = $2,635
Oh god! I did the same thing but I messed up the multiplication. I wrote down 12,648 as 12,846. I feel so silly…
But thank you!
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