Compute over and under absorption of variable overhead, Cost Accounting

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Compute Over and Under Absorption of Variable and Fixed Overhead

A company has a machine cost center for that the given information is available as

a) Budget

i. Budgeted (expected) activity                                            3000 machine hours

ii. Variable production overhead cost per machine hour      Shs. 2

iii. Fixed production overhead cost net                                Shs. 9000

b) Actual

i. Activity level                                                                      3000 machine hours

ii. Variable production overhead cost incurred                     Shs. 6400

iii. Fixed production overhead cost incurred                          Shs. 8800

Required

1. Compute the over and under absorption of variable overhead and fixed overhead cost

2. Comment on possible reasons of over or beneath absorption figures

Solution

Variable overhead cost

Actual cost incurred                                                    Shs.6400

- Overhead absorbed 3000 hrs x Shs. 2                     Shs.6000

                                                                                   Shs.  400

Below absorption may contain occurred via a combination of        

a) Increased price per unit of variable cost as an example of a rise in price or electricity

b) An increase in the number of units of overhead cost item, as an example of machine efficiency has fallen via lack of maintenance

Fixed overhead cost:

Actual cost incurred                                                   Shs. 8800

- Overhead absorbed 3000 hrs x Shs. 3                    Shs. 9000

Over absorption of overhead cost                             Shs.  200

The fixed overhead absorption rate 9000/3000 machine hours = Shs. 3 per machine hour.

The real activity level of 3000 machine hours is the similar as that budgeted. Therefore the over absorption of fixed overhead is because of expenditure factors. It may have happened as of the combination of

a) A lower price of a fixed item as an example of salary may be lower than budgeted

b) A reduced usage of what was classified as a fixed cost item as an example of the quantity of oil employed to lubricate the machines.


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