Overheads: Classification, Allocation, Apportionment, Absorption and Under/Over Absorption Questions

Question 1

Define overheads.

Accepted Answer

Overheads are indirect costs (indirect material, indirect labour and indirect expenses) that cannot be conveniently traced to a specific product/job.

Question 2

Give one example of factory overhead.

Accepted Answer

Factory rent is an example of factory overhead.

Question 3

What is allocation of overhead?

Accepted Answer

Allocation is charging an overhead item wholly to a particular cost centre when it can be directly identified with that centre.

Question 4

What is apportionment of overhead?

Accepted Answer

Apportionment is distributing a common overhead among two or more cost centres on an equitable basis.

Question 5

Define absorption of overhead.

Accepted Answer

Absorption is the process of charging overhead costs to products/jobs using a predetermined absorption rate.

Question 6

What is under-absorption of overhead?

Accepted Answer

Under-absorption occurs when overhead absorbed is less than the actual overhead incurred.

Question 7

Classify overheads on functional basis with examples.

Accepted Answer

Functional classification of overheads:
- Factory/works overheads: power, factory rent, depreciation of plant.
- Office & administration overheads: office salaries, audit fees.
- Selling & distribution overheads: advertising, sales commission, packing and freight.

Question 8

Differentiate between allocation and apportionment (any three points).

Accepted Answer

Allocation vs apportionment:

| Basis | Allocation | Apportionment |
|---|---|---|
| Meaning | whole item to one centre | split among multiple centres |
| When used | clearly identifiable | common/shared overhead |
| Example | dept supervisor salary | rent shared by area |

Question 9

State any three bases used for primary distribution of overheads.

Accepted Answer

Any three bases are: (i) floor area for rent/rates, (ii) machine hours for power or depreciation (machine-related), (iii) number of employees for canteen/welfare, (iv) direct labour hours for shared labour-related overheads.

Question 10

Explain absorption of overheads and list any three absorption methods.

Accepted Answer

Absorption of overheads means charging overheads to products/jobs using a predetermined rate.

Any three methods: (i) labour hour rate, (ii) machine hour rate, (iii) % of direct wages, (iv) % of prime cost, (v) unit rate.

Question 11

What are the causes of under/over absorption of overheads? (any three)

Accepted Answer

Causes include: inaccurate budgeting/estimation, change in capacity utilisation (actual activity differs from budget), seasonal fluctuations, inefficiency/abnormal idle time, and wrong choice of absorption base.

Question 12

State the treatment of under/over absorption (brief).

Accepted Answer

Treatment: small differences are transferred to Costing Profit & Loss. Large differences due to normal reasons are adjusted using a supplementary rate across WIP/finished goods/cost of sales. Abnormal portion is charged to Costing Profit & Loss.

Question 13

Compute machine hour rate and overhead absorbed for a job: Budgeted factory overhead ₹150,000; budgeted machine hours 30,000. Job uses 120 machine hours.

Accepted Answer

Machine hour rate = Budgeted overhead / Budgeted machine hours
= 150,000 / 30,000 = ₹5 per machine hour.

Overhead absorbed by job = 120 × 5 = ₹600.

So, machine hour rate is **₹5/hr** and overhead charged to the job is **₹600**.

Question 14

Explain primary and secondary distribution of overheads. Mention any two methods of service department apportionment.

Accepted Answer

Primary distribution is the allocation/apportionment of overheads to production and service cost centres using suitable bases (e.g., rent by floor area, power by machine hours).

Secondary distribution (re-apportionment) is transferring service department overheads (maintenance, stores, canteen) to production departments because service departments support production.

Methods of service department apportionment (any two):
1) Direct method: service dept costs distributed only to production departments.
2) Step (sequential) method: one service dept distributed to other service + production depts in sequence.
(Reciprocal method is also used when mutual services are significant.)

Question 15

Calculate supplementary rate and state adjustment: Actual overhead ₹210,000; overhead absorbed ₹200,000. Assume supplementary rate based on absorbed overhead.

Accepted Answer

Under-absorbed overhead = Actual − Absorbed = 210,000 − 200,000 = ₹10,000.

Supplementary rate (on absorbed overhead) = 10,000 / 200,000 = 0.05 = 5% (under).

Adjustment: Increase overhead charged to WIP/Finished goods/Cost of sales by **5%** of the overhead already absorbed (as required by the policy), or transfer to Costing P&L if treated as small/abnormal.

Overheads: Classification, Allocation, Apportionment, Absorption and Under/Over Absorption

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