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The budgeted overhead absorption rate for variable production overheads in department X of Lublin’s factory is £3.00 per direct labour hour and for fixed overhead is £4.50 per direct labour hour. Actual direct labour hours worked exceeded the budget by 500 hours.
Requirement
If expenditures were as expected for variable and fixed overheads, the total over absorbed overhead for the period would be
A £507.50
B £1,500.00
C £2,250.00
D £3,750.00
Answer:
When expenditures are as budgeted, but actual and budgeted production activity levels are
different, only fixed overhead can be under or over absorbed.
Over-absorbed overhead = 500 hrs × £4.50 = £2,250
Variable overhead absorbed = (500 × £3.00) = £1,500 more than budgeted in the original budget.
However, variable overhead incurred would be £1,500 more as well, leaving neither under nor over absorbed variable overheads.Why variable overhead absorbed don’t have under or over absorbed variable overheads.
I think over absorbed variable overheads = 500×4.5+500×3=3750 —> D
and actual > budget –> under why it is overWith fixed overheads, when using absorption costing, we initially charge (using the figures from the example) $4.50 for every hour worked. The $4.50 is calculated by dividing the total budgeted fixed overheads by the total budgeted hours.
However, by definition, the total fixed overheads will not change with the level of production. As a result, if we work more hours than were hours than we budgeted (because we produced more) we will be charging in total more than the budgeted total. This means we have over-absorbed (or over-charged) the fixed overheads.
This problem does not exist with variable overheads. If we work more hours then we will charge more in total, and with variable overheads we will spend more the more hours we work.
Have you watched 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 🙂
Can you tell me more about variable overheads?
I still do not understand “This problem does not exist with variable overheads. If we work more hours then we will charge more in total, and with variable overheads we will spend more the more hours we work.”By definition, the total variable overheads will vary with the number of hours worked.
If they budget on working (say) 100 hours they will budget on spending 100 x $3 = $300, but if they actually work 200 hours then they will spend 200 x $3 = $600.
However with fixed overheads, if they budget on working 100 hours then they will budget on spending 100 x $4.50 = $450, and this $450 will remain the total fixed overheads regardless of. how many hours they actually work.
Again, have you watched my free lectures?
Oh, I understand.
Thank you for your lecture about absorption costing and marginal costing, I have watched it. Your presentation is very clear.
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