under/over absorption — OpenTuition Forums

TTeo10y ago

Dear sir, this is not really a F2 question,but it was examined in F2 this question is from examiner's report for Jan 15, 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 4,000 Which 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 $4,000 I always thought that DR P/L means an expense,which means more labour hour were used?Why is it A?Thank you

John MoffatTutor10y ago#1

Because the question says that they are crediting the Profit or Loss (not they are debiting it).

TTeo10y ago#2

@johnmoffat said: Because the question says that they are crediting the Profit or Loss (not they are debiting it).

But in the P/L T-account is'nt it a debit?And if it is a debit ,should it be an expense(over absorption)?

John MoffatTutor10y ago#3

But the question you typed actual says: Dr Production overhead Cr Profit or loss account They are crediting profit or loss account which is like income - i.e. the actual hours (and therefore the amount absorbed) is less that the budget hours (and therefore the amount budgeted).

TTeo10y ago#4

@johnmoffat said: But the question you typed actual says: Dr Production overhead Cr Profit or loss account They are crediting profit or loss account which is like income - i.e. the actual hours (and therefore the amount absorbed) is less that the budget hours (and therefore the amount budgeted).

ok sir,i understood.Thanks!

John MoffatTutor10y ago#5

You are welcome :-)