ABC absorbs fixed production overheads in one of its departm

ABC absorbs fixed production overheads in one of its departments on the basis of machine hours. There were 100,000 budgeted machine hours for the forthcoming period. The fixed production overhead absorption rate was £2·50 per machine hour. During the period, the following actual results were recorded: Standard machine hours 110,000 Fixed production overheads $300,000 Which ONE of the following statements is correct?

A. Overhead was $25,000 over-absorbed B. Overhead was $25,000 under-absorbed C. Overhead was $50,000 over-absorbed D. No under- or over-absorption occurred

Solution

option B that overhead was 25000 underabsorbed is correct

Overhead absorbed = Actual hour * absorption rate = 110000 * 2.50 = 275000

Actual overhead = 300000

As overhead absorbed are less than the actual overhead , there is under absorption of overhead for $ 25000 (300000 - 275000)