A company uses a machine hour absorption rate.
During one month,the budgeted overheads are £24,000 and the budgeted machine hours are 6,400 hours.
The actual overheads incurred are £25,000.The actual machine hours operated were 6,250.
What is the total over/under absorption of overhead in the month,comparing the actual cost to the budget?

Question

Quizplus · Accepted Answer

When budgeting, the overheads are estimated and the machine hours are estimated. Therefore the budgeted overhead absorption rate is £24,000 / 6,400 = £3.75 per machine hour.In accounting terms, the overhead absorbed is £3.75 x actual hours = £3.75 x 6,250 = £23,437.50This is short by £1,562.50.Alternatively:150 hours less were worked, which means 150 x £3.75 was not absorbed as expected = £562.50Further, the overhead was £1,000 more than budgeted.

A Company Uses a Machine Hour Absorption Rate