Accounting for Overheads- Absorption Costing- Kaplan Exam Kit

KKirit10y ago

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 $694,075 What is the budgeted overhead absorption rate per hour My answer so far: Actual Overheads: $694,075 Under absorption: ($ 35,000) __________ Overhead Absorbed: $659,075 I always thought the OAR formula was Budgeted Overhead OAR = __________________ Budgeted Activity However, 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.

KKirit10y ago#1

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" ?

John MoffatTutor10y ago#2

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.

KKirit10y ago#3

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.

John MoffatTutor10y ago#4

True :-)

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