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The following question is taken from the January to June 2015 exam period.
A company uses a blanket overhead absorption rate of $5 per direct labour hour. Actual overhead
expenditure in a period was as budgeted.
The under/over absorbed overhead account for the period have the following entries:
DR CR
$ $
Production overhead 4,000 Profit or loss account 4,000Which of the following statements is true?
A) Actual direct labour hours were 800 less than budgeted
B) Actual direct labour hours were 800 more than budgeted
C) Actual direct labour hours were 4,000 less than budgeted
D) Production overhead was over absorbed by $4,000Hello The answer to the above question is choice A.
I understand how the 800 hours are calculated by taking 4000/5.
However I don’t understand the concept as to how less hours leads to under absorption.
Isn’t under absorption occurred when actual overheads and higher that absorbed?
so how is there a link to how less hours leads to under absorption.in need of your help.
kind regards
SukainaIf the actual hours worked are less than budgeted then the amount absorbed in the profit statement (actual hours x absorption rate) will be less than the budgeted total amount.
Since the actual total expenditure is the same as the budgeted total expenditure, the amount absorbed will be less that the actual, so they will have under-absorbed.
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