Budgeted production overheads are £360,000 and budgeted direct labour hours are 24,000. In the period actual direct labour hours were 23,100 and actual overheads £352,000. What is the over- or under-absorption?
Answer and explanation
Correct answer: C. Under-absorbed by £5,500
- Step 1: Overhead absorption rate = £360,000 / 24,000 hours = £15 per hour.
- Step 2: Overheads absorbed = 23,100 hours × £15 = £346,500.
- Step 3: Actual overheads £352,000 are higher than absorbed, so £5,500 is under-absorbed.
Answer
Under-absorbed by £5,500.
Why not the others: Over-absorbed would mean absorbed overhead exceeded actual overhead, which is not the case. £8,000 compares actual overheads with the budget of £360,000, which is not the absorbed amount. Over-absorbed by £8,000 makes both errors at once.
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