A Ltd has calculated a predetermined overhead rate of 22 per machine hour for its Quality Check (QC) department. This rate has been calculated for…

CA Intermediate · Cost and Management Accounting · MTP · September 2025
A Ltd has calculated a predetermined overhead rate of 22 per machine hour for its Quality Check (QC) department. This rate has been calculated for the budgeted level of activity and is considered as appropriate for absorbing overheads. The following overhead expenditures at various activity levels had been estimated. Total overheads Number of machine hours 3,38,875 14,500 3,47,625 15,500 3,56,375 16,500 You are required to: (i) CALCULATE the variable overhead absorption rate per machine hour. (ii) CALCULATE the estimated total fixed overheads. (iii) CALCULATE the budgeted level of activity in machine hours. (iv) CALCULATE the amount of under/over absorption of overheads if the actual machine hours were 14,970 and actual overheads were - 3,22,000.

Suggested Answer and Working Notes:

(i) Variable overhead absorption rate = (Difference in Total Overheads / Difference in levels in terms of machine hours) = (₹ 3,47,625 -3,38,875) / (15,500 hours - 14,500 hours) = 8,750 / 1,000 hours = 8.75 per machine hour. (ii) Calculation of Total fixed overheads: (₹) Total overheads at 14,500 hours 3,38,875 Less: Variable overheads (₹ 8.75 × 14,500) (1,26,875) Total fixed overheads 2,12,000 (iii) Calculation of Budgeted level of activity in machine hours: Let budgeted level of activity = X Then, (₹ 8.75X +2,12,000) / X = 22 8.75X + 2,12,000 = 22 X 13.25X = 2,12,000 X = 16,000 Thus, budgeted level of activity = 16,000 machine hours. (iv) Calculation of Under / Over absorption of overheads: (₹) Actual overheads 3,22,000 Absorbed overheads (14,970 hours × 22per hour) 3,29,340 Over-absorption (₹ 3,29,340 - 3,22,000) 7,340

Topics: Overheads - Absorption Costing Method

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