Discussion
Under or over absorption of overhead may arise due to which of the following causes
(i) Error in estimating overhead expenses
(ii) Error in estimating the level of production, i.e the base
(iii) Major unanticipated changes in the methods of production
Answer: D
All three are causes. Overheads are absorbed at a predetermined rate, calculated from estimated overhead expenses divided by an estimated base such as production or machine hours. An error in estimating the overhead expenses (i), an error in estimating the level of production or other base (ii), or major unanticipated changes in the methods of production (iii) can each make actual overheads differ from absorbed overheads, giving under or over absorption. So all of (i), (ii) and (iii) are right.
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