ACCA MA · Chapter 6
Accounting for overheads MCQs with Answers
11 multiple-choice questions on Accounting for overheads for ACCA MA Management Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
What is meant by overhead allocation?
- A) Charging a whole item of overhead to a single cost centre that incurred it
- B) Sharing an item of overhead between several cost centres on a fair basis
- C) Charging overheads to cost units using a predetermined rate
- D) Transferring service cost centre overheads to production cost centres
Show answer & explanation
Answer: A) Charging a whole item of overhead to a single cost centre that incurred it
Allocation charges a whole overhead to one cost centre where it can be identified entirely with that centre. Apportionment shares common overheads between centres, reapportionment moves service centre costs to production centres, and absorption charges overheads to cost units.
Question 2
What is the most appropriate basis for apportioning factory rent between cost centres?
- A) Floor area occupied
- B) Number of employees
- C) Machine hours
- D) Value of materials issued
Show answer & explanation
Answer: A) Floor area occupied
Rent relates to the space each cost centre uses, so floor area is the fairest basis. The number of employees suits costs such as canteen or personnel costs, and machine hours suit machine-related costs such as power.
Question 3
Factory rent of $60,000 is apportioned by floor area. The floor areas are: Machining 4,000 square metres, Assembly 3,500 square metres and Stores 2,500 square metres. How much rent is apportioned to Machining?
- A) $20,000
- B) $21,000
- C) $15,000
- D) $24,000
Show answer & explanation
Answer: D) $24,000
Total floor area = 4,000 + 3,500 + 2,500 = 10,000 square metres. Machining share = 60,000 x 4,000 / 10,000 = $24,000. $20,000 would be an equal split, $21,000 is Assembly's share and $15,000 is Stores' share.
Question 4
A factory has two production departments (P1, P2) and two service departments (S1, S2). Overheads after primary apportionment are P1 $80,000, P2 $60,000, S1 $30,000 and S2 $20,000. S1 serves P1 60% and P2 40%. S2 serves P1 30%, P2 50% and S1 20%. S1 does not provide any service to S2. What are P1's total overheads after all service department costs have been reapportioned?
- A) $105,500
- B) $104,000
- C) $83,600
- D) $106,400
Show answer & explanation
Answer: D) $106,400
Because S1 does not serve S2, reapportion S2 first: P1 30% = $6,000, P2 50% = $10,000, S1 20% = $4,000. S1 now totals 30,000 + 4,000 = $34,000, split P1 60% = $20,400 and P2 40% = $13,600. P1 = 80,000 + 6,000 + 20,400 = $106,400. (P2 = $83,600, and 106,400 + 83,600 = 190,000, which equals total overheads.) The direct method, which ignores the service S2 gives S1, would give $105,500.
Question 5
A department's budgeted overheads are $360,000. Budgeted activity is 24,000 direct labour hours and 12,000 machine hours. Work in the department is mainly done by hand. What is the most appropriate overhead absorption rate?
- A) $15 per direct labour hour
- B) $30 per machine hour
- C) $10 per direct labour hour
- D) $45 per direct labour hour
Show answer & explanation
Answer: A) $15 per direct labour hour
In a labour-intensive department, overheads are best absorbed on direct labour hours: 360,000 / 24,000 = $15 per labour hour. A machine hour rate ($30) would suit a machine-intensive department.
Question 6
Budgeted production overheads were $360,000 and budgeted labour hours were 24,000. Actual overheads were $372,000 and actual labour hours were 25,000. What was the under- or over-absorption of overheads?
- A) $3,000 under-absorbed
- B) $12,000 under-absorbed
- C) $3,000 over-absorbed
- D) $15,000 over-absorbed
Show answer & explanation
Answer: C) $3,000 over-absorbed
OAR = 360,000 / 24,000 = $15 per hour. Overheads absorbed = 25,000 x 15 = $375,000. Actual overheads = $372,000. Absorbed is more than actual, so overheads are over-absorbed by 375,000 - 372,000 = $3,000.
Question 7
Which of the following would cause production overheads to be under-absorbed?
- A) Actual activity was higher than budgeted, while overhead spending was as budgeted
- B) Actual overhead spending was lower than budgeted, while actual activity was as budgeted
- C) Actual overhead spending was higher than budgeted, while actual activity was as budgeted
- D) Actual overhead spending and activity were both exactly as budgeted
Show answer & explanation
Answer: C) Actual overhead spending was higher than budgeted, while actual activity was as budgeted
Under-absorption happens when overheads absorbed (actual activity x predetermined rate) are less than actual overheads. If activity is as budgeted, the amount absorbed equals the budget, so spending more than budget leaves overheads under-absorbed. Higher activity or lower spending would lead to over-absorption.
Question 8
A company absorbs production overheads on machine hours. Budgeted machine hours were 30,000. Actual overheads were $496,000, actual machine hours were 31,000, and overheads were under-absorbed by $31,000. What were the budgeted production overheads?
- A) $480,000
- B) $450,000
- C) $465,000
- D) $527,000
Show answer & explanation
Answer: B) $450,000
Overheads absorbed = actual overheads - under-absorption = 496,000 - 31,000 = $465,000. OAR = 465,000 / 31,000 actual hours = $15 per machine hour. The OAR was set as budgeted overheads / budgeted hours, so budgeted overheads = 15 x 30,000 = $450,000.
Question 9
At the end of a period, production overheads have been under-absorbed. How is the under-absorption accounted for?
- A) It is credited to the statement of profit or loss, increasing profit
- B) It is debited to the statement of profit or loss as an extra expense
- C) It is added to the value of closing inventory
- D) It is carried forward to be absorbed in the next period
Show answer & explanation
Answer: B) It is debited to the statement of profit or loss as an extra expense
Under-absorption means too little overhead has been charged to production, so the shortfall is written off as an extra charge (a debit) in the statement of profit or loss for the period. Over-absorption would be credited, increasing profit.
Question 10
Why are separate departmental overhead absorption rates usually preferred to a single factory-wide (blanket) rate?
- A) Departmental rates always lead to lower product costs
- B) Products may use each department's resources in different proportions, so separate rates give more accurate product costs
- C) Departmental rates avoid any under- or over-absorption of overheads
- D) A blanket rate cannot be used with direct labour hours
Show answer & explanation
Answer: B) Products may use each department's resources in different proportions, so separate rates give more accurate product costs
When products spend different amounts of time in departments with very different overhead costs, a single blanket rate averages these differences out and distorts product costs. Departmental rates charge each product with the overheads of the departments it actually uses. They do not remove under- or over-absorption, which comes from differences between budget and actual.
Question 11
A job uses 12 machine hours in Department X, which absorbs overheads at $22 per machine hour, and 30 direct labour hours in Department Y, which absorbs overheads at $9 per labour hour. What is the total overhead absorbed by the job?
- A) $768
- B) $651
- C) $270
- D) $534
Show answer & explanation
Answer: D) $534
Department X: 12 x 22 = $264. Department Y: 30 x 9 = $270. Total = $534. Applying the rates to the wrong departments' hours gives 12 x 9 + 30 x 22 = $768.