CIMA BA2 · Chapter 3 · Question 8 of 8
In which of the following situations would overheads DEFINITELY be under-absorbed, assuming a predetermined absorption rate based on budgeted activity?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Actual overheads are higher than budgeted and actual activity is lower than budgeted
Explanation
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.
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