How to approach it
- Budgeted overheads = budgeted units × budgeted hours per unit × rate, per product.
- Applied overheads = actual units × actual hours per unit × rate.
- Compare applied with actual incurred: applied lower = under-absorbed.
- Journal: under-absorbed is debited to P&L (or cost of sales) and credited to overhead control.
Key rules to apply
- Under/over-absorption compares absorbed with actual overhead, never budget with actual.
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Not calculating budgeted overheads even though it was asked (examiners' point).
- Crossing actual hours with budget units or vice versa.
- Reversing the debit and credit in the closing entry.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q4 without copying it.
Original practice question
Under-absorption
Rate Rs 400 per labour hour. Budget: X 10,000 units × 2 hours, Y 5,000 units × 1.2 hours. Actual: X 10,500 units × 1.9 hours, Y 5,200 units × 1.25 hours. Actual overhead Rs 10.9m.
Required: Calculate budgeted overheads and the under/over-absorption, with the entry.
Worked solution
| Working | Value |
|---|---|
| Budgeted hours: 20,000 + 6,000 | 26,000 |
| Budgeted overheads: 26,000 × 400 | Rs 10,400,000 |
| Actual hours: 19,950 + 6,500 | 26,450 |
| Applied: 26,450 × 400 | Rs 10,580,000 |
| Actual | Rs 10,900,000 |
| Under-absorbed | Rs 320,000 |
Answer: Dr Profit or loss (cost of sales) Rs 320,000; Cr Factory overhead control Rs 320,000.