CA Inter P4 · Chapter 4
Overheads - Absorption Costing Method MCQs with Answers
11 multiple-choice questions on Overheads - Absorption Costing Method for CA Inter P4 Cost and Management Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A machine costs ₹12,00,000, has an estimated scrap value of ₹60,000 and a life of 10 years. It is expected to run 2,000 hours a year, of which 5% will be lost in maintenance. It consumes 15 units of power per running hour at ₹8 per unit, and repairs are estimated at ₹38,000 a year. The machine hour rate is:
- A) ₹196.00
- B) ₹203.16
- C) ₹88.00
- D) ₹200.00
Show answer & explanation
Answer: D) ₹200.00
Effective running hours = 2,000 x 95% = 1,900. Depreciation per hour = (₹12,00,000 - ₹60,000) / 10 / 1,900 = ₹60. Power = 15 x ₹8 = ₹120. Repairs = ₹38,000 / 1,900 = ₹20. Machine hour rate = ₹60 + ₹120 + ₹20 = ₹200. Using 2,000 hours instead of effective hours gives ₹196.00.
Question 2
Budgeted factory overheads were ₹9,60,000 and budgeted direct labour hours 48,000. Actual overheads amounted to ₹9,90,000 and actual hours worked were 51,000. The overheads were:
- A) Under-absorbed by ₹30,000
- B) Over-absorbed by ₹60,000
- C) Under-absorbed by ₹60,000
- D) Over-absorbed by ₹30,000
Show answer & explanation
Answer: D) Over-absorbed by ₹30,000
Absorption rate = ₹9,60,000 / 48,000 = ₹20 per hour. Overheads absorbed = 51,000 x ₹20 = ₹10,20,000. Actual overheads = ₹9,90,000. Since absorbed exceeds actual, overheads are over-absorbed by ₹30,000.
Question 3
Where a significant amount of under-absorbed overhead arises because of incorrect estimation of overheads or activity level, the preferred method of disposal is:
- A) Writing it off to the Costing Profit and Loss Account
- B) Carrying it forward to the next accounting year
- C) Ignoring it as it will reverse in the next period
- D) Applying a supplementary rate to cost of sales, finished goods and work-in-progress
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Answer: D) Applying a supplementary rate to cost of sales, finished goods and work-in-progress
When under- or over-absorption is large and arises from wrong estimates, it is corrected through a supplementary rate, adjusting the cost of sales, finished goods and work-in-progress. Write-off to the Costing Profit and Loss Account is used when the amount is small or arises from abnormal factors. Carry forward is used only where the operating cycle extends beyond a year.
Question 4
Service department X has primary overheads of ₹84,000 and service department Y has ₹60,000. X renders 20% of its services to Y, and Y renders 20% of its services to X (the remaining services go to production departments). Using the simultaneous equation method, the total overheads of X to be apportioned are:
- A) ₹96,000
- B) ₹84,000
- C) ₹1,00,000
- D) ₹99,360
Show answer & explanation
Answer: C) ₹1,00,000
Let X and Y be the total overheads after inter-service transfers. X = 84,000 + 0.2Y and Y = 60,000 + 0.2X. Substituting: X = 84,000 + 0.2(60,000 + 0.2X) = 96,000 + 0.04X, so 0.96X = 96,000 and X = ₹1,00,000. Then Y = 60,000 + 0.2 x 1,00,000 = ₹80,000. Ignoring the reciprocal effect gives ₹96,000.
Question 5
The most appropriate basis for apportioning canteen expenses among production and service departments is:
- A) Floor area occupied by each department
- B) Direct labour hours of each department
- C) Number of employees in each department
- D) Value of plant and machinery in each department
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Answer: C) Number of employees in each department
Canteen facilities are used by employees, so the benefit received by each department is best measured by the number of employees working there. Floor area suits rent and building maintenance, while the value of plant suits insurance and depreciation of machinery.
Question 6
A single overhead absorption rate computed for the factory as a whole and applied to all products is called a:
- A) Departmental overhead rate
- B) Blanket overhead rate
- C) Supplementary rate
- D) Machine hour rate
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Answer: B) Blanket overhead rate
A blanket (single) rate = total factory overheads / total base for the whole factory. It is simple but suitable only where products pass through all departments uniformly. Departmental rates are more accurate when products use departments differently.
Question 7
Budgeted factory overheads are ₹6,30,000 and budgeted prime cost is ₹21,00,000. Overheads are absorbed as a percentage of prime cost. A job has a prime cost of ₹48,000. The overheads to be absorbed by the job are:
- A) ₹20,571.43
- B) ₹12,000.00
- C) ₹62,400.00
- D) ₹14,400.00
Show answer & explanation
Answer: D) ₹14,400.00
Absorption rate = ₹6,30,000 / ₹21,00,000 x 100 = 30% of prime cost. Overheads for the job = 30% x ₹48,000 = ₹14,400.
Question 8
Fixed production overheads are ₹18,00,000 per annum and normal capacity is 60,000 units. Actual production for the year is only 45,000 units because of low demand. In line with CAS-3, the fixed production overhead to be included in the cost of each unit produced is:
- A) ₹40
- B) ₹0
- C) ₹30
- D) ₹10
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Answer: C) ₹30
Fixed production overheads are absorbed on the basis of normal capacity: ₹18,00,000 / 60,000 = ₹30 per unit. Overheads absorbed = 45,000 x ₹30 = ₹13,50,000. The unabsorbed amount of ₹4,50,000, relating to unutilised capacity, is not loaded on to production but charged to the Costing Profit and Loss Account. Spreading all fixed overheads over actual output would give ₹40.00 per unit, overstating cost.
Question 9
In a highly mechanised department where most of the work is done by machines with little manual intervention, the most suitable overhead absorption method is the:
- A) Direct labour cost percentage rate
- B) Direct material cost percentage rate
- C) Machine hour rate
- D) Rate per unit of output
Show answer & explanation
Answer: C) Machine hour rate
Where machines dominate production, most overheads (depreciation, power, repairs) are related to machine running time, so absorbing them on machine hours reflects the cause of overheads best. Labour-based methods suit labour-intensive departments.
Question 10
Overheads under-absorbed because the factory was closed for two months due to a flood should be:
- A) Recovered through a supplementary rate on all products
- B) Carried forward to next year as deferred overhead
- C) Transferred to the Costing Profit and Loss Account
- D) Added to the value of closing finished goods
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Answer: C) Transferred to the Costing Profit and Loss Account
Under-absorption caused by abnormal factors such as floods, fire or strikes does not relate to the normal cost of products. It is written off to the Costing Profit and Loss Account so that product costs are not distorted. A supplementary rate is used only for differences arising from incorrect estimates.
Question 11
Department P absorbs overheads on machine hours: budgeted overheads ₹4,50,000, budgeted machine hours 15,000. Department Q absorbs on labour hours: budgeted overheads ₹2,40,000, budgeted labour hours 20,000. A job requires 18 machine hours in P and 25 labour hours in Q. Total overheads absorbed by the job are:
- A) ₹840.00
- B) ₹847.71
- C) ₹966.00
- D) ₹1,290.00
Show answer & explanation
Answer: A) ₹840.00
Rate for P = ₹4,50,000 / 15,000 = ₹30 per machine hour. Rate for Q = ₹2,40,000 / 20,000 = ₹12 per labour hour. Job overheads = (18 x ₹30) + (25 x ₹12) = ₹540 + ₹300 = ₹840. A blanket rate of ₹19.71 on all 43 hours would give ₹847.71.