Under/Over absorbed fixed production overheads

Mmish10y ago

Please help. Question a) A company uses standard absorption costins systems. The fixed overhead absorption rate is based on labour hours. Budget Actual Fixed production overhead $450,000 $475,000 Output 50,000 units 60,000 units Labour hours 900,000 930,000 Calculate the under/over absorbed fixed production overheads for the year? A) Budgeted OAR= Fixed overhead production / budgeted labour hours =450,000/900,00 =0.5 Calculate the overheds that have ben actually absorbed =930,000*0.5 =465,000 Under/over absorption= Overhead incurred-Overhead absorbed =475,000-465,000 =10,000 under absorption? The answer is 65,000 over absorbed I don't understand why? I used the same steps for an earlier question, which was correct (it is below): Question b) A company uses a standard absorption costing system. The fixed overhead absorption rate is based on machine hours. Extracts from the company’s records for last year were as follows: Budget Actual Fixed production overhead $500,000 $485,000 Output 70,000 units 65,000 units Machine hours 200,000 190,000 The under- or over-absorbed fixed production overheads for the year were: A) Absorption rate = 500,000/200,000=2.50 Absorbed overheads = 190,000 x $2.50/hour = $475,000 Actual overheads = $485,000 Under-absorption = $10,000 How is question A different to Question B? I used the same approach in both. Please help! Thanks

John MoffatTutor10y ago#1

Your answer to the first question (10,000 under absorbed) is correct. If you have copied the question correctly, then there is a mistake in whichever book you are using. However, these questions are not asked in Paper F5 (it is Paper F2). In theory you can be asked F2 questions in Paper F5, but in practice they do not ask questions on over and under absorption. If you are studying for F5 then I do suggest that you watch our free lectures - they are a complete course and cover everything you need to be able to pass the exam well. First download our free Study Guide which links to all the lectures and suggests the best questions to practice.

Mmish10y ago#2

Hi John. Thanks for your help. I appreciate that this is a probably a typical F2 question- that might come in F5. But I just want to be sure I can calculate the overunder absoprtion incase they come up in any shape or form. I picked the questions from a Kaplan book: The question again sir: Budget Actual Fixed production overhead $450,000 $475,000 Output 50,000 units 60,000 units Labour hours 900,000 930,000 Calculate the under/over absorbed fixed production overheads for the year? This is the solutions in the book: The over-absorbed fixed production overheads for the year were $65,000. Absorption rate = $450,000/ 900,000 = $0.50/hour Absorbed overheads 60,000 units × 18 hrs/unit × $0.50/hour = $540,000 Actual overheads =$475,000 Over-absorption = $65,000 Are you suggesting that the soultion in the Kaplan guide is incorrect?

Mmish10y ago#3

I will alos take you advice and use the material you provide on F5. But please clarify on the above. thanks

John MoffatTutor10y ago#4

This sort of question is not asked at all in Paper F5. It could be asked at F2 certainly, but if it was there would have to be more information. If the question has asked for the standard cost per unit first and then asked for the over/under absorption then Kaplan's answer would have been correct. However, because all the question said was that overheads are absorbed on a labour hour basis, the implication is that they are absorbed into the profit statement on the basis of labour hours, in which case their answer is wrong and your answer is correct :-)

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