Illustration 4 Using data from figure 5.0 assume that the production overhead absorption rate was calculated where an activity of 200 machine hours was estimated. Prepare a summary showing any over or under absorption of overhead cost where the actual machine hours charged to jobs turns out to be a)150 hours b)250 hours
a)
Where actual activity is 150 hours
Fixed
Variable
Total
Shs.
Shs.
Shs.
Overhead incurred
500
450
950
Variable overhead absorbed
(450)
(150 x 3)
Fixed overhead absorbed
(375)
(150 x 2.50)
Total Overhead absorbed
(825)
(150 x 5.50)
____
____
___
Under absorption of overhead
125
NIL
125
b)
Where actual activity is 250 hours
Fixed Shs.
Variable Shs.
Total Shs.
Overhead incurred
500
750
1250
Variable overhead absorbed
(750)
(250 x 3)
Fixed overhead absorbed
(625)
(250 x 2.50)
Total Overhead absorbed
(1375)
(250 x 5.50)
___
___
___
Under absorption of overhead
125
NIL
125
c)
Expenditure level and the absorption of production overhead cost
A charge in expenditure on an overhead cost item may occur because of a charge in the price
per unit and/or because of change in the number of units of the overhead commodity which
are required
Expenditure changes can affect the absorption of both fixed and variable overheads
Illustration 5
AB Ltd has a machine cost center for which the following information is available
