The cost variance report was being discussed at a review meeting where in Cost Accountant of the company reported under-absorption of production…

(i) Amount of under-absorption of production overheads during the current year (₹) Total production overheads actually incurred during the current year 4,50,000 Less: 'Written off' obsolete stores 42,000 Net production overheads actually incurred : (A) 4,08,000 Production overheads absorbed by 43,000 machine hours@ 8 per hour : (B) 3,44,000 Amount of under – absorption of production overheads : [(A) – (B)] = 64,000 (ii) Accounting treatment of under absorption of production overheads It is given in the statement of the question that 18,000 units were produced, and 5,000 units were 40% complete, 20% of the under-absorbed overheads were due to defective planning and the rest were attributable to normal increase in costs of indirect materials and indirect labour. (20% of 64,000) i.e.,12,800 of under-absorbed overheads were due to defective planning. This being abnormal, should be debited to the Costing Profit and Loss A/c.Balance (80% of 64,000) i.e.,51,200 of under-absorbed overheads should be distributed over work-in-progress, finished goods and cost of sales by using supplementary rate. Total under-absorbed overheads = 64,000 Apportionment of unabsorbed overheads of 51,200 over, work-in progress, finished goods and cost of sales Equivalent Completed Units (₹) Work-in-Progress (5,000 units × 40%× 2.56) (Refer to working note) 2,000 5,120 Finished goods (8,000 units × 2.56) 8,000 20,480 Cost of sales (10,000 units × 2.56) 10,000 25,600 20,000 51,200 Working Note Supplementary rate per unit = 51,200 / 20,000 = 2.56