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Can anyone answer the situation (ii)?
A company uses absorption costing with a predetermined hourly overhead absorption rate. The following situation have both occurred:
(i) Actual overhead expenditure exceeded planned expenditure: and
(ii) Actual hours worked were less than the planned hoursWhich of the following statement is correct?
a) situation (i) would cause overhead to be over absorbed and situation (ii) would cause overhead to be under absorbed.
b) situation (i) would cause overhead to be under absorbed and situation (ii) would cause overhead to be over absorbed.
c) both situation would cause overhead to be over absorbed
d) both situation would cause overhead to be under absorbedThe correct answers is (D)
i understand the situation (i) but i don’t know situation (ii).
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for me, u should identify indle time
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No Right Answer is Situation A..
1–Leads to over absorption and that it was the Situation..
2–If actual hours worked were below budgeted then by applying the predetermined rate which is based on a budget hour to this lower number will leads to UNDER absorptionThe correct answer is D.
To explain, let me invent some numbers:
Planned/Budget: $20,000 and 10,000 hours
Actual: $22,000 and 8,000 hours
The absorption rate is always based on budget and so is 20,000/10000 = $2 per hour.
We then charge $2 per hour for every hour actually worked.
This will mean that we charge 8,000 x $2 = $16,000
This is less than the actual total of $22,000 (so we have under-charged / under-absorbed)
It is less for two reasons: firstly because the actual total was higher than budget total.
However, even if the actual total was correct at $20,000 we would still have underabsorbed because we only charged for the actual hours worked (8000) when we had budgeted on working 10000.I hope that helps.
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