CAF-5 · Chapter 9 · Question 8 of 10
Which of the following situations will require an adjustment for "under or over-absorbed overheads" in the income statement?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) When using Absorption Costing, and actual activity levels or actual fixed costs differ from the budgeted estimates.
Explanation
Absorption costing uses a pre-determined overhead absorption rate (OAR). If actual overheads differ from budgeted overheads, or actual production differs from budgeted production, it creates an under or over-absorption of fixed overheads which must be adjusted in the income statement. Marginal costing does not use fixed OARs, so this adjustment does not exist there.
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