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hi, i have a question from bpp practice kit that i don’t understand. this is the question:
a company uses a blanket overhead absorption rate of $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:
Dt side = prod. overhead $4000
Cr side = profit or loss a/c $4000which of the following 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 4000 less than budgeted
D. production overhead was over absorbed by $4000so, my answer is B, because debit side of over/under overhead a/c means that the overhead is under absorbed. so, the only way for the o/h to be under absorbed is by the actual direct labour hours to be less than budgeted isn’t it? but the answer given is A. please explain this to me, thanks.
But it seems that you have answered your own question 🙂
You have written that your answer is B because the debit side means that the overhead has been under-absorbed – it has indeed been under-absorbed. You then write that the only way to be under-absorbed is by the actual hours to be less than budgeted – that is true as well.
However answer B says the opposite – it says that actual hours are more than budgeted.
It is answer A that says that actual hours are less than budgeted 🙂Ooo. My bad?. My actual question was “why less actual hours causes under absorption overheads?”. Thank you?
It is easier for me to explain with a few numbers:
Suppose they budget on overheads of $20,000 and they budget on working 10,000 hours.
The absorption rate is therefore $2 per hour.Suppose they actually work only 8,000 hours. That means they will absorb 8,000 x $2 = $16,000.
However fixed overheads will stay fixed at $20,000. But they will only have absorbed $16,000. So they will have under-absorbed by $4,000.It will help you to watch my free lectures on this. The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
Thank you so much. I get it now?
I get confused because i mixed up between this topic and the variances.
Thank you once again?
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