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Morning John and fellow forum members,
I’m stuck on the following exam question, which is:
A firm recovers overheads on chargeable consulting hours
Budgeted overheads were $615,000
Actual consulting hours were 32,150 hrs
Overheads were under-recovered by $35,000
Actual overheads were $694,075What is the budgeted overhead absorption rate per hour
My answer so far:
Actual Overheads: $694,075
Under absorption: ($ 35,000)
__________
Overhead Absorbed: $659,075I always thought the OAR formula was
Budgeted Overhead
OAR = __________________
Budgeted ActivityHowever, I have done the following:
Overhead Absorbed: $659,075 / Actual activity: 32,150 hours= $20.50 OAR
Your guidance would be gratefully appreciated with this question. Thank you.
As a brief follow-on from the above query. I’ve noticed that the following information was also included in the question:
Budgeted overheads were $615,000
Should I presume that the above has been included as a “red herring” ?
The amount absorbed is always the actual hours multiplied by the standard absorption rate.
So although the standard absorption rate does equal budgeted overheads / budgeted hours, it will also always be equal to absorbed overheads / actual hours.
So the answer of $20.50 is correct.
Thank you for your guidance John.
Thus, I shall also presume that
“Budgeted overheads were $615,000”
is ancillary information and need not be used within any required calculations for this question.
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