QUESTIONS

8 Overheads and absorption costing 46 mins

8.1 A method of sharing overhead costs involves spreading common costs over cost centres on the basis of
benefit received.
What is this known as?
A Overhead absorption
B Overhead apportionment
C Overhead allocation
D Overhead analysis (2 marks)

8.2 The following extract of information is available concerning the four cost centres of EG Ltd.
Service cost
Production cost centres centre
Machinery Finishing Packing Canteen
Number of direct employees 7 6 2 -
Number of indirect employees 3 2 1 4
Overhead allocated and apportioned $28,500 $18,300 $8,960 $8,400
The overhead cost of the canteen is to be re-apportioned to the production cost centres on the basis of
the number of employees in each production cost centre.
After the re-apportionment, what is the total overhead cost of the packing department, to the nearest $?
A $1,200
B $9,968
C $10,080
D $10,160 (2 marks)

8.3 Which of the following bases of apportionment would be most appropriate for apportioning heating costs
to production cost centres?
A Floor space occupied (square metres)
B Volume of space occupied (cubic metres)
C Number of employees
D Labour hours worked (2 marks)

8.4 When do over-absorbed overheads occur?

A When absorbed overheads exceed actual overheads.
B When absorbed overheads exceed budgeted overheads.
C When actual overheads exceed budgeted overheads.
D When budgeted overheads exceed absorbed overheads. (2 marks)

8.5 The production overhead of department D is absorbed using a machine hour rate. Budgeted production
overheads for the department were $280,000 and the actual machine hours were 70,000. Production
overheads were under absorbed by $9,400.
If actual production overheads were $295,000 what was the overhead absorption rate per machine
hour (to the nearest cent)?
A $4.00
B $4.08
C $4.21
D $4.35 (2 marks)

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8.6 What is overhead apportionment used for?

A To charge whole items of costs to cost centres
B To charge cost units with an appropriate share of overheads
C To charge whole items of costs to cost units
D To spread common costs over cost centres (2 marks)

8.7 A vehicle repair company recovers overheads on the basis of labour hours. Budgeted overheads were
$615,000 and actual labour hours were 48,225. Overheads were over absorbed by $35,000.
If actual overheads were $640,150, what was the budgeted overhead absorption rate per hour?
A $13.27
B $14.00
C $18.29
D $19.29 (2 marks)

8.8 Actual overheads $496,980

Actual machine hours 16,566
Budgeted overheads $475,200
Based on the data above, and assuming that the budgeted overhead absorption rate was $32 per hour,
what were the number of machine hours (to the nearest hour) budgeted to be worked?
A 14,850
B 15,531
C 16,566
D 30,381 (2 marks)

8.9 What is an overhead absorption rate used for?

A To share out common costs over benefiting cost centres
B To find the total overheads for a cost centre
C To charge overheads to products
D To control overheads (2 marks)

8.10 A company has two production departments, Cutting and Finishing. The budgeted overheads and
operating hours for the two departments for next year are:
Cutting $210,000 60,000 machine hours 4,000 labour hours
Finishing $200,000 5,000 machine hours 14,000 labour hours
From the information given, what should the pre-determined overhead absorption rates for the
departments be based on?
A Both be based on machine hours
B Both be based on labour hours
C Be based on machine hours for the cutting department and labour hours for the finishing
department
D Be based on labour hours for the cutting department and machine hours for the finishing
department (2 marks)

8.11 A company absorbs production overheads using a machine hour basis.

In order to calculate any over or under absorbed overheads which of the following would be needed, in
addition to the pre-determined machine hour rate?
A Budgeted overheads and actual overheads incurred
B Budgeted overheads and actual hours worked
C Actual overheads incurred and budgeted hours
D Actual overheads incurred and actual hours worked (2 marks)

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8.12 A company had the following budgeted and actual production overhead costs in its two production cost
centres, Machining and Assembly.
Budget Actual
Machining $210,000 $212,000
Assembly $136,000 $134,000
Which statement is true?
A From the data available it is not possible to determine over/under absorption.
B Machining overheads were over-absorbed: Assembly overheads were under-absorbed.
C Machining overheads were over-absorbed: Assembly overheads were over-absorbed.
D Machining overheads were under-absorbed: Assembly overheads were over-absorbed.
(2 marks)

8.13 The following production overhead costs relate to a production cost centre:
Budget $124,000
Actual $126,740
Absorbed $125,200
Which of the following statements is true?
A Overheads were over-absorbed by $1,200.
B Overheads were over-absorbed by $1,540.
C Overheads were under-absorbed by $1,200.
D Overheads were under-absorbed by $1,540. (2 marks)

8.14 There are two production cost centres and two service cost centres in a factory. Production overheads
have been allocated and apportioned to cost centres and now require re-apportionment from service cost
centres to production cost centres. Relevant details are:
Service cost Service cost
Centre A Centre B
Total overhead $42,000 $57,600
% to Production Cost Centre X 40 55
% to Production Cost Centre Y 60 45
What is the total re-apportionment to Production Cost Centre Y?
A $42,720
B $48,480
C $51,120
D $56,880 (2 marks)

8.15 Overheads are absorbed at a pre-determined rate based on direct labour hours. The following additional
information is available for a period:
Budget $164,000 overhead expenditure 10,000 direct labour hours
Actual $158,000 overhead expenditure 9,800 direct labour hours
What was the overhead over/under-absorption in the period?
A $2,720 over-absorbed
B $3,224 over-absorbed
C $3,280 under-absorbed
D $6,000 under-absorbed (2 marks)

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8.16 A company uses absorption costing. In a period, 34,000 units of the company's single product were
manufactured and 33,000 units were sold.
Consider the following two statements:
1. Fixed production overheads would be over-absorbed.
2. Profit would be higher than in the previous period.
Are the statements true in relation to the situation described or is it not possible to determine whether or
not they are true?
Statement 1 Statement 2
A Cannot determine Cannot determine
B Cannot determine True
C True Cannot determine
D True True
(2 marks)

8.17 Which of the following would be the most appropriate basis for reapportioning the cost of personnel
services in a factory?
A Floor space occupied
B Hours worked by direct operatives
C Number of direct operatives
D Number of employees (2 marks)

8.18 Which of the following are practical reasons for using absorption costing?
(i) To establish the profitability of different products
(ii) To aid decision making by focusing on product contribution
(iii) To encourage management to produce more goods in order to absorb all allocated overheads
(iv) To value closing inventory in accordance with accounting principles
A (i) and (iii)
B (ii) and (iv)
C (i) and (iv)
D (ii) and (iii) (2 marks)

8.19 A product has direct material costs of $7.15 per unit and direct labour costs of $8.25 per unit. Each
unit spends 3 machine hours in the assembly cost centre and 1.5 labour hours in the finishing cost
centre. Production overhead absorption rates are as follows.
Assembly $1.76 per machine hour
Finishing $3.28 per labour hour
What is the full production cost per unit?
A $25.60
B $27.88
C $15.40
D $20.44 (2 marks)

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 QUESTIONS

8.20 Direct labour hours are used as the basis for overhead absorption in a production cost centre. The
following data are available for a period:
Actual direct labour hours worked 9,760
Actual overheads incurred $86,920
Overhead under-absorption $2,496
Budgeted direct labour hours 10,000
What was the overhead absorption rate in the period?
A $8.65
B $9.16
C $8.44
D $8.94 (2 marks)

(Total = 40 marks)

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 MA2 MANAGING COSTS AND FINANCES

9 Marginal costing and absorption costing 29 mins

9.1 The fixed production overhead absorption rate for product Y is $2.50 per direct labour hour. Each unit of
Y requires 3 direct labour hours. Inventory of product Y at the beginning of the month was 200 units
and at the end of the month was 250 units.
What is the difference in the profits reported for the month using absorption costing compared with
marginal costing?
A The absorption costing profit would be $375 less.
B The absorption costing profit would be $125 greater.
C The absorption costing profit would be $375 greater.
D The absorption costing profit would be $1,875 greater. (2 marks)

9.2 A company produces a single product for which cost and selling price details are as follows.
$ per unit $ per
unit
Selling price 28
Direct material 10
Direct labour 4
Variable production overhead 2
Fixed production overhead 5
21
Profit per unit 7

Last period, 8,000 units were produced and 8,500 units were sold. The opening inventory was 3,000
units and profits reported using marginal costing were $60,000.
What profits would be reported using an absorption costing system?
A $47,500
B $57,500
C $59,500
D $62,500 (2 marks)

9.3 A company had opening inventory of 48,500 units and closing inventory of 45,500 units. Profits based
on marginal costing were $315,250 and on absorption costing were $288,250.
What is the fixed production overhead absorption rate per unit?
A $5.94
B $6.34
C $6.50
D $9.00 (2 marks)

9.4 Which of the following are arguments in favour of the use of absorption costing?
(i) Closing inventory is valued in accordance with accounting standards.
(ii) There is no under or over absorption of overheads.
(iii) When sales fluctuate but production is constant, absorption costing smoothes out profit
fluctuations.
A (i) only
B (i) and (ii)
C (i) and (iii)
D (ii) and (iii) (2 marks)

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 QUESTIONS

9.5 A company currently uses absorption costing. The following information relates to Product X for
Month 1:
Opening inventory Nil
Production 900 units
Sales 800 units

If the company had used marginal costing, which of the following combinations would be true?
Profit Inventory valuation
A Would be higher Would be higher
B Would be higher Would be lower
C Would be lower Would be higher
D Would be lower Would be lower (2 marks)

9.6 When opening inventory was 8,500 litres and closing inventory 6,750 litres, a firm had a profit of
$27,400 using marginal costing.
Assuming that the fixed production overhead absorption rate was $2 per litre, what profit would be
reported using absorption costing?
A $30,900
B $30,500
C $23,900
D $27,400 (2 marks)

9.7 Are the following statements about marginal costing TRUE or FALSE?
1 Inventory value will always be lower than when using absorption costing
2 Profit will always be higher than when using absorption costing
Statement 1 Statement 2
A True True
B True False
C False True
D False False
(2 marks)

9.8 A company manufactures a single product. Production and sales quantities for a period were:
Production Sales
Budget 100,000 units 102,000 units
Actual 97,000 units 96,000 units
The fixed production overhead absorption rate is $1.40 per unit.
If marginal costing had been used instead of absorption costing how would the profit for the period have
differed?
A $1,400 less using marginal costing
B $1,400 more using marginal costing
C $4,200 less using marginal costing
D $4,200 more using marginal costing (2 marks)

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9.9 A company sold 82,000 units of its single product in a period in which 84,000 units were
manufactured.
Consider the following statements:
1. Inventory value at the end of the period would be higher than at the beginning of the period.
2. Inventory values both at the beginning and at the end of the period would be higher using
absorption rather than marginal costing.
Are the statements true or false in relation to the situation described?
Statement 1 Statement 2
A False False
B False True
C True False
D True True
(2 marks)

9.10 What distinguishes absorption costing from marginal costing?

A Product costs include both prime cost and production overhead.
B Product costs include both production and non-production costs.
C Inventory valuation includes a share of all production costs.
D Inventory valuation includes a share of all costs. (2 marks)

9.11 A company uses a marginal costing system. 10,000 units of its single product were manufactured in a
period during which 9,760 units were sold.
If absorption costing is applied instead what would be the effect on profit?
A Higher by (240 units  fixed production overhead cost per unit)
B Lower by (240 units  fixed production overhead cost per unit)
C Higher by [240 units  (fixed production overhead cost per unit + fixed non-production overhead
cost per unit)]
D Lower by [240 units  (fixed production overhead cost per unit + fixed non-production overhead
cost per unit)] (2 marks)

9.12 Which of the following correctly describes the concept of contribution?

A It is the cost of a unit of product or service which would be avoided if that unit were not produced
or provided.
B It is the difference between sales value and the marginal cost of sales.
C It is the difference in units between the expected sales volume and the breakeven sales volume.
D It is the difference between total sales revenue and total fixed costs. (2 marks)

(Total = 24 marks)

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