Accounting Multiple Choice Question – 12 November 2017

The home of multiple choice questions for all your KS3, KS4 and KS5 Business Studies, Economics and Accounting requirements.

Accounting

Which formula is used to calculate the overhead absorption rate?

Select ONE answer:

  1. Actual overheads / actual activity
  2. Actual overheads / budgeted activity
  3. Budgeted overheads / actual activity
  4. Budgeted overheads / budgeted activity
  5. Budgeted overheads / managed activity

What is the purpose of the overhead absorption rate?……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This is multiple choice question is suitable for Accounting KS5 classes.

The answer is 4 – Overhead absorption rates are our attempt at coming up with the best ‘guess’ of how much overhead should be given to a product. In traditional costing systems, the rates are likely to be based on machine hours or labour hours. The process is a little more refined in activity based costing, but the intention is still the same: we are trying to find an equitable way of sharing out the overheads to products and are therefore looking for a method that relates the absorption base to the incidence of the overheads (establish a ‘causal link’). If a business is machine intensive, machine hours would be the most appropriate base as the overheads would be related to machine usage. But this is taking a very wide view: it would be better to break the business down into separate departments and choose individual rates for each department. In order for the business to move along and not wait a full year before it can sell its products we need to forecast the overheads and forecast the total hours to be used when making all of our products (assuming a traditional system), in other words we work with budgeted figures when calculating the overhead absorption rates. The formula to use is Overhead absorption rate = budgeted overhead/budgeted activity.

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Author: stuart001uk2014

Referral marketing, business, economics and accounting s​pecialist & corporate mentor

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