Over or Under Absorption

Bryan5025

This is my first post so please forgive any mistakes. Last night at College our teacher was teaching us Under and Over Absorbtion (even though we learned it at Level 3) and me and two other class mates are certain she got it wrong. Can anyone confirm if she is right or if my and my mates are right?

The Question was;

For the year ended 31 Dec 2004, the planned overhead for the machine cost centre at Coocraft Ltd was:
Overheads £132,000
Volume of Activity, 15,000 machine hours

In January the cost centre incured £12,000 of overheads and 1,350 hours were worked

Calculate the pre determined overhead rate per machine hour and the overhead under/over absorption in the month.

We all agreed the pre determined rate was £8.80 per hour, and that cost centre absorbed £11,880 of overheads. So then me and my mates said that was an under absorption of £120, but the teacher taught the class it was an over absorption of £120.

Are we wrong for doubting our teacher? Sorry for the long post.

AK002

Looking at that you are correct for doubting your teacher. You're right.

If it was £12,120 then it would be over absorbed by £120.

SandyHood

Absorption

1. Budgeted Overhead valuexxxxxxxxxxxxxxxxxx£132,000 = £8.80 per machine hour
   Buudgeted machine hours xxxxxxxxxxxxxxxxx15,000 hrs
   
   
2. Overhead absorbedxxxxxxxx1,350 hrs x £8.80 = £11,880
   Less Actual overhead incurredxxixxxxxxxxxxxxxx £12,000
   Under-absorbed overhead xxxxxxxxxxxxxxxxxxxxxxx £120