COST ACCOUNTING
INTRODUCTION TO COST ACCOUNTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Decrease in costing profit
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Increase in costing profit
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Decrease in Financial Accounts profit
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No effect on profits of both the accounts
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Detailed explanation-1: -If overhead is over absorbed, this means that fewer actual overhead costs were incurred than expected, so that more cost is applied to cost objects than were actually incurred. This means that the recognition of expense is reduced in the current period, which increases profits.
Detailed explanation-2: -Meaning of Under and Over Absorption of Overheads If the actual expense exceed of the amount of predetermined rates, there is said to be an under absorption of overheads and conversely, if the actual expenses fall short of the amount of predetermined rates, it is a case of over absorption of overheads.
Detailed explanation-3: -When predetermined rates are applied overheads absorbed may not be equal to the amount of the actual overheads incurred. Thus this may result in under or over absorption of overheads.
Detailed explanation-4: -Absorption costing allocates fixed overhead costs to a product whether or not it was sold in the period. This type of costing method means that more cost is included in the ending inventory, which is carried over into the next period as an asset on the balance sheet.