Your company uses a historical cost system and applies overheads on the basis of “pre-determined” rates. The following are the figure from the Trial…

(i) Computation of over/ under absorption of manufacturing overheads: (₹) Actual overheads 21,32,720 Overhead recovered (applied) 18,29,520 Under absorption (recovery) of overhead 3,03,200 (ii) Treatment of under-absorbed overhead The under-absorption of overheads is disposed-off using two methods: (1) Write off the under – absorbed overhead to Costing Profit & Loss Account. (2) Use supplementary rate, to recover the under-absorbed overhead. According to first method, the total unabsorbed overhead amount of 3,03,200 will be written off to Costing Profit & Loss Account. The use of this method will reduce the profits of the concern by - 3,03,200 for the period. According to second method, a supplementary rate may be used to adjust the overhead cost of each cost unit. The under-absorbed amount in total may, at the end of the accounting period, be apportioned on ratio basis to the three control accounts, viz, Work-in-progress, Finished goods stock and Cost of goods sold account. Apportioning of under-absorbed overhead can be carried out by using direct labour hours/ machine hours/ the value of the balances in each of these accounts, as the basis. Prorated figures of under-absorbed overhead over Work-in-progress, Finished goods stock and Cost of goods sold in this question on the basis of values, of the balances in each of these accounts are as follows: Additional Overhead (Under-absorbed) Total (₹) (₹) (₹) Work-in-progress 7,07,400 35,370 7,42,770 Finished Goods Stock 11,53,660 57,683 12,11,343 Cost of Goods Sold 42,02,940 2,10,147 44,13,087 60,64,000 3,03,200 63,67,200 By using this method, the profit for the period will be reduced by - 2,10,147 and the value of stock will increase by - 93,053. The latter will affect the profit of the subsequent period. Working Notes The apportionment of under-absorbed overhead over Work-in-progress, Finished goods stock and Cost of goods sold on the basis of their value in the respective account is as follows: Overhead to be absorbed by work-in-progress = (₹ 3,03,200 /60,64,000) × 7,07,400 = 35,370Overhead to be absorbed by finished goods = (₹ 3,03,200 /60,64,000) × 11,53,660 = 57,683Overhead to be absorbed by cost of goods sold = (₹ 3,03,200 /60,64,000) × 42,02,940 = 2,10,147