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.