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Hi I met a question for cost absorption
A company uses absorption costing with a predetermined hourly overhaed absorption rate. The following situations have both occured:
(i) Actual overhaed expenditure exceeded planner expenditure; and
(ii) Actual hours worked were less than the planned hoursWhich of the statement is correct
A Situation (i) would cause overhaeds to be over absorbed and situation (ii) would cause overhaeds to be under absorbedB Situation (i) would cause overhaeds to be under absorbed and situation (ii) would cause overhaeds to be over absorbed
C Both situations would cause overheads to be over adsorbed
D Both situations would cause overheads to be under adsorbed
Please explain to me for this question. Thank you
The pre-determined absorption rate will have been based on the budgeted/planned expenditure and the budgeted/planned hours.
The total absorbed is the actual hours x the absorption rate.
So if the actual expenditure is more than planned, the overheads will have been under-absorbed.
If the actual hours are less than the planned hours, then the overheads will have been under-absorbed.
I do suggest that you watch the free lectures on absorption costing.
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