CIMA BA2 · Chapter 3
Accounting for overheads MCQs with Answers
8 multiple-choice questions on Accounting for overheads for CIMA BA2 Fundamentals of Management Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
What is the difference between overhead ALLOCATION and overhead APPORTIONMENT?
- A) Allocation charges a whole overhead to a single cost centre, whereas apportionment shares an overhead between several cost centres on a fair basis
- B) Allocation shares overheads between cost units, whereas apportionment charges them to cost centres
- C) Allocation applies only to service cost centres, whereas apportionment applies only to production cost centres
- D) There is no difference; the two terms mean the same thing
Show answer & explanation
Answer: A) Allocation charges a whole overhead to a single cost centre, whereas apportionment shares an overhead between several cost centres on a fair basis
An overhead is allocated when it can be identified wholly with one cost centre, for example the salary of a department's supervisor. A shared overhead, such as factory rent, is apportioned between the cost centres that benefit using a suitable basis such as floor area.
Question 2
Factory rent of $84,000 is apportioned on the basis of floor area. The floor areas of the cost centres are: Machining 2,400 m2, Assembly 1,800 m2, Stores 800 m2 and Canteen 1,000 m2. How much rent is apportioned to Assembly?
- A) $21,000
- B) $30,240
- C) $36,000
- D) $25,200
Show answer & explanation
Answer: D) $25,200
Total floor area = 2,400 + 1,800 + 800 + 1,000 = 6,000 m2. Rent per m2 = $84,000 / 6,000 = $14. Assembly = 1,800 x $14 = $25,200.
Question 3
The overheads of the Maintenance service cost centre total $36,000. Maintenance work is used as follows: Production department P1 60%, Production department P2 30%, Stores (a service cost centre) 10%. Using the DIRECT method, which ignores work done for other service cost centres, how much Maintenance overhead is reapportioned to P1?
- A) $21,600
- B) $24,000
- C) $12,000
- D) $18,000
Show answer & explanation
Answer: B) $24,000
The direct method ignores the 10% used by Stores and reapportions the whole $36,000 between the production departments in the ratio 60:30. P1 = $36,000 x 60/90 = $24,000.
Question 4
A factory has two production departments (P1 and P2) and two service departments (X and Y). Overheads allocated and apportioned so far are X $20,000 and Y $12,000. The service departments' work is used as follows: X: P1 40%, P2 40%, Y 20% Y: P1 50%, P2 30%, X 20% Using the reciprocal (algebraic) method, what is the total service department overhead charged to P1, to the nearest $?
- A) $17,500
- B) $14,000
- C) $17,667
- D) $15,333
Show answer & explanation
Answer: C) $17,667
Let X and Y be the total overheads of each service department after reciprocal charges. X = 20,000 + 0.2Y and Y = 12,000 + 0.2X. Substituting: X = 20,000 + 0.2(12,000 + 0.2X) = 22,400 + 0.04X, so 0.96X = 22,400 and X = 23,333.33. Y = 12,000 + 0.2 x 23,333.33 = 16,666.67. Charge to P1 = 0.4 x 23,333.33 + 0.5 x 16,666.67 = 9,333.33 + 8,333.33 = $17,666.67, which is $17,667 to the nearest $.
Question 5
A production department is highly automated, and most of its overhead costs relate to running its machines. Which basis is most appropriate for absorbing its overheads into products?
- A) Rate per machine hour
- B) Rate per direct labour hour
- C) Percentage of direct material cost
- D) Rate per square metre of floor area
Show answer & explanation
Answer: A) Rate per machine hour
Overheads should be absorbed on the basis that best reflects how products consume the department's resources. In a machine-intensive department, overheads are driven mainly by machine time, so a machine hour rate is most appropriate. Floor area is an apportionment basis, not an absorption basis.
Question 6
Budgeted production overheads were $450,000 and budgeted direct labour hours were 60,000. Overheads are absorbed on a labour hour basis. Actual overheads were $472,000 and actual labour hours worked were 61,500. What was the over- or under-absorption of overheads for the period?
- A) $10,750 over-absorbed
- B) $22,000 under-absorbed
- C) $10,750 under-absorbed
- D) $11,250 over-absorbed
Show answer & explanation
Answer: C) $10,750 under-absorbed
Overhead absorption rate = $450,000 / 60,000 hours = $7.50 per hour. Overhead absorbed = 61,500 x $7.50 = $461,250. Actual overhead $472,000 exceeds the amount absorbed by $10,750, so overheads are under-absorbed.
Question 7
A company absorbs production overheads at $12 per machine hour. During the period 28,000 machine hours were worked and overheads were over-absorbed by $9,200. What were the actual production overheads for the period?
- A) $326,800
- B) $345,200
- C) $336,000
- D) $110,400
Show answer & explanation
Answer: A) $326,800
Overhead absorbed = 28,000 x $12 = $336,000. Over-absorption means more overhead was absorbed than was actually incurred, so actual overhead = $336,000 - $9,200 = $326,800.
Question 8
In which of the following situations would overheads DEFINITELY be under-absorbed, assuming a predetermined absorption rate based on budgeted activity?
- A) Actual overheads are higher than budgeted and actual activity is lower than budgeted
- B) Actual overheads are lower than budgeted and actual activity is higher than budgeted
- C) Actual overheads are higher than budgeted and actual activity is higher than budgeted
- D) Actual overheads equal budgeted overheads and actual activity is higher than budgeted
Show answer & explanation
Answer: A) Actual overheads are higher than budgeted and actual activity is lower than budgeted
Absorbed overhead = predetermined rate x actual activity. If activity is below budget, less than the budgeted overhead is absorbed; if actual spending is also above budget, actual overhead must exceed the absorbed amount, so under-absorption is certain. In the other situations the result is over-absorption or depends on the size of the two differences.