Absorption costing: five questions to try now
Real past-paper questions, the answer key from the mark scheme, and the explanation that goes with it. No account needed to answer them.
Question 1
A company’s fixed overheads details were as shown.
fixed hours overheads $ budget 10 000 150 000
actual 11 000 170 000
What was the over or under absorption of fixed overheads?
Answer: B.
The rate comes from the BUDGET: 150 000 over 10 000 hours is $15. Absorbing the actual 11 000 hours charges out $165 000, against $170 000 incurred, so overheads are UNDER absorbed by $5000. The extra 1000 hours brought in $15 000 more than planned, but the overheads overran by $20 000, and the larger movement decides the direction. The $15 000 options are the overhead difference alone with no absorption done.
Question 2
The following information is available for a business.
fixed overheads hours $ budget 180 000 10 000
actual 190 000 11 000
What was the over-absorption or under-absorption of fixed overheads?
Answer: A.
The rate comes from budget: 180 000 over 10 000 hours is $18 per hour. Absorbed overhead uses that rate at ACTUAL hours, so 18 times 11 000 is $198 000, against $190 000 actually incurred. More was absorbed than incurred, so overheads are OVER-absorbed by $8000 and the excess is credited to the income statement. The $10 000 options compare budgeted with actual overhead, which measures a spending difference rather than absorption.
Question 3
The following data were available for a department for July.
budget actual
direct labour hours 40 000 41 950
machine hours 60 000 60 900
overheads $480 000 $499 200
What was the over or under absorption of overheads for July?
Answer: D.
The department runs 60 000 machine hours against 40 000 labour hours, so machine hours are the base. The rate is 480 000 over 60 000, which is $8 per machine hour, and absorbed overhead is 8 times the actual 60 900 hours, or $487 200. Actual overhead was $499 200, so $12 000 more was incurred than absorbed, which is UNDER absorption. The $4200 options come from absorbing on direct labour hours instead, and under absorption is the answer whenever actual cost exceeds the amount charged out.
Question 4
The following budgeted and actual information is available.
budgeted actual
overheads $460000 $420000
labour hours 28750 21000
machine hours 9200 7000
What would be the company’s most suitable overheads absorption rate?
Answer: A.
Choose the base the business actually works in, and build the rate from BUDGET. Budgeted labour hours are 28 750 against only 9200 machine hours, so the operation is labour intensive and a labour hour rate is appropriate: 460 000 over 28 750 is $16. The options at $20 and $60 use the ACTUAL figures, which cannot be right for a predetermined rate that has to exist before the period starts, and $50 per machine hour applies the correct budget figures to the minority base.
Question 5
A manufacturing business has a service department, X, and production departments, Y and Z. Department Z is labour intensive. How is the overhead absorption rate set for department Z? Each answer gives, in order: first task; second task; third task.
Answer: A.
Apportion, reapportion, then absorb, and absorb on BUDGETED hours. The service department's costs cannot be skipped over: everything is shared across all three departments first, then X's share is pushed out to Y and Z, because only production departments make units to absorb into. The rate must use budgeted hours, since a predetermined rate has to exist before the period starts. Options C and D shortcut the service department, and B and D use actual hours, which would make the rate unavailable until the period had ended.
What this practice covers
These questions are drawn from past CIE 9706 Accounting papers and filtered to absorption costing. You answer, you find out immediately whether you were right, and you get the reasoning for the correct option and for each distractor. Wrong answers go to a mistakes locker so you can come back to exactly those.
Practice is free. You need an account only so your progress and your mistakes are still there next time.
What examiners see students get wrong here
These are the errors that cost marks on absorption costing, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
- Using the words allocation and apportionment as though they meant the same thing.
- Recalculating the absorption rate using actual figures at the year end.
- Using budgeted activity instead of actual activity to calculate overhead absorbed.
- Getting the direction wrong: under-absorption reduces profit.
- Absorbing service department costs directly onto products without reapportioning first.
- Apportioning on a basis with no link to the cost, such as splitting rent by number of machines.
- Including selling and administration overheads in the absorption rate. Only production overheads are absorbed.
Revise it first
If any of the above is unfamiliar, work through the notes before practising: Absorption costing revision notes.