Using the same data (absorption rate £9 per direct labour hour, actual hours 19,500, actual overheads £184,500), what is the overhead under- or over-absorbed?
Answer and explanation
Correct answer: D. Under-absorbed by £9,000
- Step 1: Overhead absorbed = 19,500 × £9 = £175,500.
- Step 2: Actual overhead = £184,500.
- Step 3: Actual exceeds absorbed by £9,000, so overhead is under-absorbed and the shortfall is charged against profit.
Answer
Under-absorbed by £9,000.
Why not the others: Over-absorbed by £9,000: Absorbed (£175,500) is less than actual (£184,500), so the overhead is under-absorbed. Under-absorbed by £4,500: This is the difference between actual and budgeted overheads and ignores absorbed overheads. Over-absorbed by £4,500: This has the wrong amount as well as the wrong direction.
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