Once every production department has its share of overhead, the last step is to charge that overhead to the products. This needs a rate, and a rate needs a decision: per unit, per labour hour, per machine hour, or as a percentage of some cost. The choice changes what each product appears to cost.
Because the rate is set before the year starts, it never matches reality exactly, and the difference shows up as under- or over-absorbed overhead.
This topic covers the absorption bases, departmental and factory-wide rates, the treatment of non-production overheads, predetermined rates and the accounting for under- and over-absorption, the expenditure and volume variances that explain it, and the separate treatment of fixed and variable overheads. It is a favourite exam topic, and the calculations are short once the method is clear.
In 30 seconds
Absorption rate = overhead of the department ÷ budgeted activity (units, direct labour hours, machine hours, % of direct labour cost or % of prime cost). Rates are set in advance from the budget. Overhead absorbed = actual activity × predetermined rate. If absorbed is less than actual overhead, overhead is under-absorbed (reduces profit). If absorbed is more, it is over-absorbed (increases profit).
The difference splits into an expenditure variance (budgeted overhead − actual overhead) and a volume variance ((actual − budgeted activity) × fixed rate). Fixed and variable overheads can have separate rates.
Overhead absorption rates
When all production overhead has been allocated or apportioned to production departments, each department’s overhead absorption rate (also called the overhead recovery rate) is:
Absorption rate = total overhead allocated and apportioned to the department ÷ volume of activity in the period
| Basis of activity | Rate | When it suits |
|---|---|---|
| Units produced | Per unit | Only where all units are identical. Also used in standard costing |
| Direct labour hours | Per direct labour hour | Common. Suits labour-intensive departments |
| Direct labour cost | Percentage of direct labour cost | When hours are not recorded |
| Machine hours | Per machine hour | Common. Suits machine-intensive departments |
| Prime cost (direct materials + direct labour) | Percentage of prime cost | Uncommon |
The basis should charge overhead to units on a fair basis, reflecting what causes the overhead. A department full of automatic machines should use machine hours. A hand-assembly department should use labour hours.
Steps in absorbing overhead
- Find the total overhead of the department.
- Find the total activity on the chosen basis for all products.
- Divide to get the rate.
- Multiply the rate by the activity of each product (or unit) to find its overhead.
How the basis changes product costs
A department has overhead of ₦96,000. Product P: 4,000 units, each needing 1 labour hour, 0.5 machine hours and ₦500 of direct labour. Product Q: 2,000 units, each needing 2 labour hours, 3 machine hours and ₦800 of direct labour. Total labour hours = 4,000 + 4,000 = 8,000. Total machine hours = 2,000 + 6,000 = 8,000. Total direct labour cost = ₦2,000,000 + ₦1,600,000 = ₦3,600,000.
| Basis | Rate | Overhead to P | Per unit of P | Overhead to Q | Per unit of Q |
|---|---|---|---|---|---|
| Direct labour hours | ₦96,000 ÷ 8,000 = ₦12 per hour | ₦48,000 | ₦12.00 | ₦48,000 | ₦24.00 |
| Machine hours | ₦96,000 ÷ 8,000 = ₦12 per hour | ₦24,000 | ₦6.00 | ₦72,000 | ₦36.00 |
| Direct labour cost | ₦96,000 ÷ ₦3,600,000 = 2.667% | ₦53,333 | ₦13.33 | ₦42,667 | ₦21.33 |
The total is always ₦96,000, but the way it is split between the products changes with the basis. Under machine hours, Q carries six times the overhead per unit of P, because it uses far more machine time. The basis should therefore match how the department really works.
Departmental rates or one factory-wide rate
A firm can calculate a rate for each production department or one blanket rate for the whole factory. A blanket rate is quicker but less exact. If departments differ in how much overhead they carry per hour, and products use them in different proportions, a single rate gives some products too much overhead and others too little.
When a question has two or more production departments, assume separate departmental rates are wanted unless told otherwise.
Example. Department 1 has overhead of ₦90,000 and Department 2 has ₦60,000. Product M (4,000 units) uses 1 hour per unit in Department 1 and 0.25 hours in Department 2. Product N (2,000 units) uses 1 hour in Department 1 and 2.5 hours in Department 2. Department 1 has 4,000 + 2,000 = 6,000 hours and Department 2 has 1,000 + 5,000 = 6,000 hours.
| Product M | Product N | |
|---|---|---|
| Department rates: D1 ₦90,000 ÷ 6,000 = ₦15 per hour; D2 ₦60,000 ÷ 6,000 = ₦10 per hour | (1 × 15) + (0.25 × 10) = ₦17.50 | (1 × 15) + (2.5 × 10) = ₦40.00 |
| Blanket rate: ₦150,000 ÷ 12,000 hours = ₦12.50 per hour | 1.25 hours × 12.50 = ₦15.63 | 3.5 hours × 12.50 = ₦43.75 |
The blanket rate understates the overhead of M and overstates that of N, because N spends most of its time in the cheaper department but is charged at the average rate. Departmental rates are fairer.
Non-production overheads
In many costing systems, administration and selling and distribution overheads are not absorbed into product costs. They are expensed in full in the period. They are never added to the value of inventory. The reason for absorbing production overhead is mainly to value inventory and measure profit.
It is possible, though, to add non-production overheads to full production cost to find a full cost of sale. If so, a fair basis is needed. Administration and selling costs may be added as a percentage of production cost, and selling and distribution costs as a percentage of production cost or of sales value.
Example. A firm budgets to sell 80,000 units of X at ₦9 and 40,000 units of Y at ₦12. Full production costs are ₦420,000 for X and ₦300,000 for Y. Administration overhead is ₦144,000, absorbed as a percentage of production cost. Selling and distribution overhead is ₦180,000, absorbed as a percentage of sales revenue.
- Administration rate.
₦144,000 ÷ (₦420,000 + ₦300,000) = 20% of production cost. - Sales.
X = ₦720,000; Y = ₦480,000; total ₦1,200,000.
Selling rate = ₦180,000 ÷ ₦1,200,000 = 15% of sales.
| ₦ | Product X | Product Y |
|---|---|---|
| Sales | 720,000 | 480,000 |
| Production cost | 420,000 | 300,000 |
| Administration (20% of production cost) | 84,000 | 60,000 |
| Selling and distribution (15% of sales) | 108,000 | 72,000 |
| Full cost of sale | 612,000 | 432,000 |
| Profit | 108,000 | 48,000 |
Predetermined rates
If rates were based on actual overhead and actual activity, nothing could be costed until the year ended. Managers need unit costs as soon as products are made. So a predetermined absorption rate is calculated in advance for the whole year, from budgeted overhead expenditure and budgeted activity. It is also called the fixed overhead absorption rate or fixed overhead recovery rate.
The method is exactly the allocation, apportionment and absorption already described, but using budget figures.
Under-absorbed and over-absorbed overhead
Actual overhead and actual output will almost never equal the budget. So the amount absorbed into products differs from the amount actually spent.
Overhead absorbed = actual activity × predetermined rate. Over- or under-absorption = overhead absorbed − actual overhead incurred. If positive: over-absorbed. If negative: under-absorbed.
- Over-absorption. Too much overhead has been charged to production, so cost of sales has been overstated. The over-absorbed overhead is added to profit.
- Under-absorption. Too little has been charged, so cost of sales is understated. The under-absorbed overhead is deducted from profit.
When a unit is made, the system debits finished goods and credits the fixed production overhead account with the overhead absorbed. At the end of the period, the balance left on the overhead account is the under- or over-absorption. It is transferred to the income statement. No adjustment is made to the value of closing inventory for the under- or over-absorption.
Worked calculation
Budgeted production overhead is ₦480,000 and budgeted direct labour hours are 40,000, so the rate is ₦12 per hour. Actual results: 38,000 direct labour hours; actual production overhead ₦492,000; direct materials ₦420,000; direct labour ₦380,000; administration ₦110,000; selling and distribution ₦130,000; sales ₦1,700,000. There is no opening or closing inventory.
- Overhead absorbed.
38,000 × ₦12 = ₦456,000. - Under-absorption.
₦456,000 − ₦492,000 = ₦36,000 under-absorbed. - Full production cost.
₦420,000 + ₦380,000 + ₦456,000 = ₦1,256,000 (equals cost of sales here). - Profit.
Sales ₦1,700,000 − ₦1,256,000 = ₦444,000.
Less under-absorbed overhead ₦36,000 = ₦408,000.
Less administration ₦110,000 and selling ₦130,000 = ₦168,000. - Check.
Using actual costs: ₦1,700,000 − (₦420,000 + ₦380,000 + ₦492,000) − ₦110,000 − ₦130,000 = ₦168,000. ✓
Why under- or over-absorption happens
Two things can differ from the budget: how much was spent, and how much work was done. Each produces a variance, which is favourable if it causes over-absorption and adverse if it causes under-absorption.
| Variance | Formula | Meaning |
|---|---|---|
| Expenditure variance | Budgeted overhead − actual overhead | Adverse if actual spending exceeded the budget (overspending or an under-estimated budget) |
| Volume variance | (Actual activity − budgeted activity) × fixed absorption rate | Favourable if more activity than budgeted. Adverse if less |
More hours than budgeted may come from overtime or extra workers. Fewer hours may come from staff shortages, absence, production hold-ups or lack of orders.
Example (all fixed overhead). Budgeted overhead ₦1,200,000 and budgeted hours 80,000 give a rate of ₦15 per hour. Actual hours were 84,000 and actual overhead ₦1,230,000.
- Absorbed = 84,000 × ₦15 = ₦1,260,000.
Actual = ₦1,230,000.
Over-absorbed = ₦30,000. - Expenditure variance.
₦1,200,000 − ₦1,230,000 = ₦30,000 adverse. - Volume variance.
(84,000 − 80,000) × ₦15 = ₦60,000 favourable. - Net = ₦60,000 F − ₦30,000 A = ₦30,000 F, which equals the over-absorption. ✓
Fixed and variable overheads
Fixed overhead does not change in total when output changes. Variable overhead rises and falls with output, and is usually calculated per direct labour hour. Where the system separates the two, each has its own absorption rate, and the total rate is their sum.
Example. Budgeted fixed overhead is ₦900,000. Variable overhead is ₦4 per labour hour. Budgeted hours are 50,000.
- Fixed rate.
₦900,000 ÷ 50,000 = ₦18. - Variable rate = ₦4.
- Total rate = ₦22 per hour.
What happens if the budgeted volume changes?
Fixed overhead per hour falls when the budgeted hours rise, because the same total is spread over more hours. The variable rate is the same at any volume. With the same ₦900,000 fixed overhead: at 60,000 hours the fixed rate is ₦15, and at 40,000 hours it is ₦22.50. The variable rate stays at ₦4 in both cases. Total fixed overhead is unchanged. Total variable overhead = hours × ₦4.
Under- or over-absorption with fixed and variable overhead
Variable overhead is expected to move with the actual hours worked, so the calculation of expected expenditure changes. Two rules apply:
- Expected expenditure = budgeted fixed overhead + (actual hours × variable rate).
- The volume variance applies to fixed overhead only.
Example. Using the figures above, actual hours were 46,000 and actual overhead (fixed and variable together) was ₦1,110,000.
| ₦ | |
|---|---|
| Overhead absorbed: 46,000 × ₦22 | 1,012,000 |
| Actual overhead | (1,110,000) |
| Under-absorbed | (98,000) |
| Expected overhead for 46,000 hours: 900,000 + (46,000 × 4) | 1,084,000 |
| Expenditure variance: 1,084,000 − 1,110,000 | 26,000 adverse |
| Volume variance: (46,000 − 50,000) × ₦18 | 72,000 adverse |
| Total | 98,000 adverse |
The ideas in more depth
Why under- and over-absorption is not an error
It is the inevitable result of using a forecast to charge costs during the year. The fixed overhead is a lump of cost that does not change when output changes, yet the rate treats it as if each hour caused a fixed slice. If output is lower than planned, fewer slices are charged than the lump costs, so the cost is under-absorbed.
A good accountant treats the figure as information: a large volume variance means output is below plan, a large expenditure variance means spending is out of control.
Choosing the activity level for the rate
The budgeted activity used in the rate affects unit costs. A low planned volume gives a high fixed rate, and a high volume gives a low one. If management is over-optimistic about output, unit costs will be too low and there will be under-absorption. Consistently large variances suggest that the budget needs revising.
Linking to standard costing
The overhead expenditure and volume variances calculated here are the same variances that appear in the standard costing chapter, where the fixed overhead volume variance is further split into capacity and efficiency parts. Learn the idea here and it will carry over.
Exam technique
- Always write the rate first, with its working.
- State clearly whether the overhead is under-absorbed or over-absorbed and whether the adjustment adds to or reduces profit.
- When asked for variances, calculate both and check that they add to the total difference.
Worked example: a full question
Scenario. Lokoja Steel Ltd budgets fixed production overhead of ₦720,000 and variable overhead of ₦5 per direct labour hour, with 36,000 direct labour hours. Actual hours were 39,000 and actual overhead (fixed and variable) was ₦960,000. Calculate the absorption rates, the over- or under-absorbed overhead, and the expenditure and volume variances.
- Rates.
Fixed = ₦720,000 ÷ 36,000 = ₦20 per hour.
Variable = ₦5 per hour.
Total = ₦25 per hour. - Absorbed.
39,000 × ₦25 = ₦975,000. - Over-absorbed.
₦975,000 − ₦960,000 = ₦15,000 (adds to profit). - Expected overhead for 39,000 hours.
₦720,000 + (39,000 × ₦5) = ₦915,000. - Expenditure variance.
₦915,000 − ₦960,000 = ₦45,000 adverse. - Volume variance.
(39,000 − 36,000) × ₦20 = ₦60,000 favourable. - Check.
₦60,000 F − ₦45,000 A = ₦15,000 F, which equals the over-absorption. ✓
Choosing the activity level for the rate
The predetermined rate depends not only on the basis (hours, machine hours, units) but on the level of activity chosen. A company with fixed overhead of ₦1,200,000 could use one of three levels:
| Activity level | Hours | Rate per hour | Absorbed at actual 9,000 hours | Over- or under-absorbed (actual overhead ₦1,200,000) |
|---|---|---|---|---|
| Practical capacity (maximum achievable) | 12,000 | ₦100 | ₦900,000 | ₦300,000 under |
| Normal capacity (long-run average) | 10,000 | ₦120 | ₦1,080,000 | ₦120,000 under |
| Budgeted activity for the year | 8,000 | ₦150 | ₦1,350,000 | ₦150,000 over |
A low rate based on practical capacity charges each unit with only the cost of capacity it actually uses, and leaves the cost of unused capacity as an under-absorption. A high rate based on a low budget charges every unit generously, and any extra volume produces over-absorption.
In examinations, the question tells you which level to use (the budget, or “normal” or “maximum capacity”), as in the Bally Nigeria question, where fixed production overhead was absorbed on a stated production capacity of 250,000 units. Always use the stated denominator.
The ledger entries for overhead
In the cost ledger, actual overhead expenditure is debited to a production overhead control account as it is incurred. As units are made, overhead is absorbed: debit work-in-progress and credit the overhead control account at the predetermined rate. At the end of the period, the balance left on the control account is the under- or over-absorption.
| Production overhead control account (₦) | |
|---|---|
| Debit: actual overhead incurred | 492,000 |
| Credit: overhead absorbed into work-in-progress (38,000 hours × ₦12) | (456,000) |
| Balance: under-absorbed | 36,000 |
The debit balance of ₦36,000 is closed to the income statement as an extra charge against profit (debit income statement, credit overhead control). Had the balance been a credit, the entry would be reversed and profit increased. No part of the balance is added to stock values; stock stays at the predetermined cost.
Why an annual rate is used and not a monthly one
If overhead were absorbed at a different rate each month, product costs would swing up and down with the season. Suppose fixed overhead is ₦100,000 every month, but production is 1,000 hours in a busy month and 500 in a slack month. A monthly rate would be ₦100 an hour in the busy month and ₦200 in the slack month, so identical products would be costed at different amounts.
An annual rate (total expected overhead ÷ total expected hours) gives one rate through the year, and under- and over-absorption occurs month to month and tends to cancel out over the full year.
Using absorption rates in decisions: a caution
Absorbed overhead is useful for pricing and stock valuation, but it can mislead decisions. A product charged ₦360 of fixed overhead on 3 hours at ₦120 may look unprofitable at a price that actually covers all its cash costs. If fixed overhead will be incurred anyway, accepting the order adds contribution. The relevant costing topics explain this. Always ask whether the absorbed cost will change with the decision.
Checklist for a rate and variance question
- Identify the overhead (fixed, variable, or both) and the base.
- Find the budgeted overhead and the budgeted activity (or capacity, if stated).
- Calculate the rate, and the overhead per unit or per job.
- Calculate the overhead absorbed from actual activity.
- Compare with actual overhead to find the under- or over-absorption.
- If asked, split into expenditure and volume variances, and check that they sum to the total.
- State the effect on profit.
Common mistakes in the exam
- Using actual overhead and actual hours to find the rate. The rate uses budget figures.
- Mixing up over-absorbed (absorbed more than spent) and under-absorbed (absorbed less than spent).
- Adding under-absorbed overhead to profit instead of deducting it.
- Adjusting closing inventory for under- or over-absorption.
- Applying the volume variance to variable overhead.
- Using the wrong expected expenditure in the variance. With variable overhead it is based on actual hours.
- Absorbing administration or selling overhead into inventory.
- Using a blanket rate when separate departmental rates are expected.
Quick revision
- Rate = department overhead ÷ budgeted activity. Bases: units, labour hours, machine hours, % labour cost, % prime cost.
- Set in advance from the budget. Absorbed = actual activity × rate.
- Absorbed − actual: positive = over-absorbed (adds to profit); negative = under-absorbed (reduces profit).
- Expenditure variance = budget − actual overhead. Volume variance = (actual − budget activity) × fixed rate.
- Fixed and variable rates are separate; expected expenditure uses actual hours for the variable part.
- Non-production overheads are period costs and not absorbed into inventory.
Practice questions
These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer.
Section A style: multiple choice
Question 1. Budgeted overhead is ₦840,000 and budgeted machine hours are 12,000. The machine hour rate is:
- ₦60
- ₦65
- ₦70
- ₦80
Show the answer
C. ₦840,000 ÷ 12,000 = ₦70 per machine hour.
Question 2. The absorption rate is ₦10 per direct labour hour. Actual hours were 5,200 and actual overhead was ₦50,000. Overhead is:
- Over-absorbed by ₦2,000
- Under-absorbed by ₦2,000
- Over-absorbed by ₦5,200
- Correctly absorbed
Show the answer
A. Absorbed = 5,200 × ₦10 = ₦52,000, which is ₦2,000 more than actual.
Question 3. Under-absorbed overhead is:
- Added to profit
- Deducted from profit
- Added to closing inventory
- Ignored
Show the answer
B. Too little was charged to production, so profit is reduced.
Question 4. Overhead absorption rates are normally based on:
- Actual overhead and actual activity
- Budgeted overhead and budgeted activity
- Selling prices
- Prior year’s profit
Show the answer
B. They are predetermined so that unit costs are known as production proceeds.
Question 5. Budgeted fixed overhead is ₦600,000 for 50,000 hours. Actual hours are 55,000. The volume variance is:
- ₦60,000 adverse
- ₦60,000 favourable
- ₦50,000 favourable
- ₦600,000 favourable
Show the answer
B. Rate = ₦12. (55,000 − 50,000) × ₦12 = ₦60,000, favourable because more hours were worked.
Question 6. Budgeted overhead is ₦500,000 and actual overhead ₦520,000. The expenditure variance is:
- ₦20,000 favourable
- ₦20,000 adverse
- ₦500,000 adverse
- Nil
Show the answer
B. Actual spending exceeded the budget.
Question 7. A fixed overhead absorption rate falls when:
- Budgeted activity rises and fixed overhead is unchanged
- Budgeted activity falls
- Actual overhead rises
- Selling prices rise
Show the answer
A. The same total is spread over more hours.
Question 8. Which overhead is NOT usually absorbed into the cost of inventory?
- Factory rent
- Production supervisors’ salaries
- Selling and distribution overhead
- Depreciation of production machinery
Show the answer
C. It is a period cost.
Question 9. The volume variance relates to:
- Fixed overhead only
- Variable overhead only
- Both equally
- Selling costs
Show the answer
A. Variable overhead is expected to vary with actual volume.
Question 10. Two departments with different overhead per hour, used by products in different proportions, are best costed using:
- A blanket rate
- Separate departmental rates
- No rates
- The selling price
Show the answer
B. A blanket rate distorts product costs in that case.
Section B style: written questions
Question 11 (10 marks). Explain why predetermined overhead absorption rates are used and why under- or over-absorption of overhead arises. State how it is treated in the income statement.
Question 12 (20 marks). Bida Fabrication Ltd has two production departments.
(a) Department A has overhead of ₦72,000 and 12,000 direct labour hours. Department B has overhead of ₦100,000 and 8,000 machine hours. Calculate the overhead rates and the overhead absorbed by a product that uses 3 direct labour hours in A and 2 machine hours in B. (5 marks)
(b) Explain the disadvantage of a single blanket rate. (3 marks)
(c) Budgeted fixed overhead is ₦720,000 and variable overhead is ₦5 per direct labour hour. Budgeted hours are 36,000. Actual hours were 39,000 and actual overhead was ₦960,000. Calculate the fixed and variable absorption rates, the under- or over-absorbed overhead, and the expenditure and volume variances. (10 marks)
(d) State two possible reasons for an adverse volume variance. (2 marks)
A further written question
Question 13 (10 marks). Budgeted production overhead is ₦480,000 and budgeted direct labour hours are 40,000. Actual hours were 38,000 and actual overhead was ₦492,000. All overhead is fixed. (a) Calculate the absorption rate and the under- or over-absorbed overhead. (4 marks) (b) Split the difference into expenditure and volume variances. (4 marks) (c) State how the difference is treated in profit. (2 marks)
Model answers
Show the model answer to Question 11
Why predetermined rates. If rates were based on actual overhead and actual activity, they could not be worked out until the end of the year, so product costs and profit information would be delayed. Managers need unit costs as soon as products are made, to price and to value stock. So the rate is fixed in advance for the whole year from budgeted overhead and budgeted activity.
Why under- or over-absorption arises. Actual overhead and actual activity almost never equal the budget. The overhead absorbed (actual activity × predetermined rate) therefore differs from the overhead actually incurred. If less is absorbed than incurred, overhead is under-absorbed. If more, it is over-absorbed. There are two causes: actual spending differing from the budget (expenditure variance) and actual activity differing from the budget (volume variance).
Treatment. The difference is an adjustment to profit for the period. Over-absorbed overhead is added to profit, and under-absorbed overhead is deducted from profit. No adjustment is made to the value of closing inventory.
Show the model answer to Question 12
(a)
- Department A.
₦72,000 ÷ 12,000 = ₦6 per direct labour hour. - Department B.
₦100,000 ÷ 8,000 = ₦12.50 per machine hour. - Overhead absorbed by the product.
(3 × ₦6) + (2 × ₦12.50) = ₦18 + ₦25 = ₦43.
(b) A blanket rate averages overhead across the whole factory. If departments carry different amounts of overhead per hour and products use them in different proportions, a blanket rate gives some products too much overhead and others too little, so product costs and prices may be distorted. Departmental rates are more exact.
(c)
- Fixed rate.
₦720,000 ÷ 36,000 = ₦20 per hour. - Variable rate = ₦5.
- Total rate = ₦25.
- Absorbed = 39,000 × ₦25 = ₦975,000.
- Actual overhead ₦960,000, so overhead is over-absorbed by ₦15,000.
- Expected expenditure for 39,000 hours = ₦720,000 + (39,000 × ₦5) = ₦915,000.
- Expenditure variance.
₦915,000 − ₦960,000 = ₦45,000 adverse. - Volume variance.
(39,000 − 36,000) × ₦20 = ₦60,000 favourable. - Net.
₦60,000 − ₦45,000 = ₦15,000 favourable, which agrees with the over-absorption.
(d) Fewer hours than budgeted because of staff shortages or absence; hold-ups in production; lack of customer orders. (Any two.)
Show the model answer to Question 13
(a)
- Rate = ₦480,000 ÷ 40,000 = ₦12 per hour.
- Absorbed = 38,000 × ₦12 = ₦456,000.
- Actual = ₦492,000.
- Under-absorbed by ₦36,000.
(b)
- Expenditure variance.
₦480,000 − ₦492,000 = ₦12,000 adverse. - Volume variance.
(38,000 − 40,000) × ₦12 = ₦24,000 adverse. - Total = ₦36,000 adverse, which equals the under-absorption.
(c) The under-absorbed overhead is an adjustment that is deducted from profit for the period. It does not change the value of closing inventory.
Pathfinder on Overhead absorption and under- or over-absorption
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
Asks for a machine hour rate from a given overhead, machine set-up time and machine hours. It tests how to choose the right activity base.
Revise first: Overhead absorption rates
From the previous syllabus. An item asks which description fits overhead absorption: charging costs to a number of cost centres or units, tested against allocation and apportionment.
Revise first: Overhead absorption rates
Multiple-choice items often ask for a rate, an over- or under-absorption figure or a volume variance from given data. Check Section A of every diet you practise.
Revise first: Under-absorbed and over-absorbed overhead
Written questions may include departmental rates, reapportionment followed by absorption, or an income statement with under- or over-absorbed overhead. Look for these inside multi-part costing questions.
Revise first: Why under- or over-absorption happens
Source: ICAN Pathfinder, Management Accounting. Diets covered: May Diet, 2026 and May Diet, 2021 (previous syllabus). May Diet, 2025 and November Diet, 2024 are not covered here.
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