Test 1: Overheads: Absorption Costing Method: answer key
This chapter-wise practice test covers Chapter 4: Overheads: Absorption Costing Method - Test 1 for CA Intermediate Group 2 students preparing for the January 2027 examination attempt. It carries 50 marks across 25 questions in case scenarios and standalone practical MCQs with a time limit of 60 minutes and no negative marking.
25 questions across 1 chapter, 50 marks and 60 minutes in the timed paper. Every answer below is shown with the working behind it and the authority it rests on.
Law and standards used: ICAI Study Material for CA Intermediate Paper 4: Cost and Management Accounting (relevant for 2027 attempt).
Questions
25
Marks
50
Time limit
60 minutes
Attempt
January 2027
Group
Group 2
Law basis
ICAI Study Material for CA Intermediate Paper 4: Cost and Management Accounting (relevant for 2027 attempt)
Question 1 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. Apex Polychem Ltd has two production departments, Mixing (P1) and Packing (P2), and three service departments, Stores (S1), Maintenance (S2) and Quality Control (S3). For the month of April 2026, the following overheads are to be apportioned: rent and rates ₹2,40,000; depreciation on plant ₹4,80,000; power ₹1,80,000; staff welfare ₹90,000. Directly allocated departmental overheads are: P1 ₹1,50,000; P2 ₹1,20,000; S1 ₹40,000; S2 ₹80,000; S3 ₹20,000. The following data are available. P1: floor area 4,000 sq ft; plant value ₹30 lakh; HP of machines 80; machine hours 1,000; workers 120. P2: floor area 3,000 sq ft; plant value ₹20 lakh; HP 60; machine hours 1,000; workers 80. S1: area 1,500 sq ft; plant value ₹5 lakh; HP 10; machine hours 1,000; workers 30. S2: area 1,000 sq ft; plant value ₹40 lakh; HP 30; machine hours 1,000; workers 20. S3: area 500 sq ft; plant value ₹5 lakh; HP nil; machine hours nil; workers 50. Total floor area 10,000 sq ft, plant value ₹100 lakh, total workers 300. Rent is apportioned on floor area; depreciation on plant value; power on HP multiplied by machine hours; staff welfare on number of workers. You are required to answer the following MCQs based on primary distribution of overheads.
What is the amount of rent and rates apportioned to the Maintenance department (S2)?
₹24,000 (correct answer)
₹36,000
₹48,000
₹12,000
Answer: A — ₹24,000
Explanation. Rent rate per sq ft = ₹2,40,000 ÷ 10,000 sq ft = ₹24 per sq ft. Maintenance department area is 1,000 sq ft. Rent apportioned to S2 = 1,000 × ₹24 = ₹24,000. Option b uses Stores area of 1,500 sq ft, while option d incorrectly takes half the correct area.
Where it goes wrong. Using Stores or Quality Control floor area instead of Maintenance floor area.
Question 4 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
What amount of staff welfare is apportioned to the Mixing department (P1)?
₹24,000
₹30,000
₹45,000
₹36,000 (correct answer)
Answer: D — ₹36,000
Explanation. Welfare rate per worker = ₹90,000 ÷ 300 workers = ₹300 per worker. Mixing department has 120 workers. Welfare apportioned to P1 = 120 × ₹300 = ₹36,000. Option a uses 80 workers of Packing, option b uses 100 workers, and option c uses an arbitrary 150 workers.
Where it goes wrong. Using the wrong worker count or dividing by production workers only.
Question 5 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. Zenith Consumer Care Ltd operates a moulding department. For the year 2026-27, the department budgeted fixed production overheads at ₹8,00,000 and variable production overheads at ₹30 per machine hour. Budgeted machine hours were 20,000. A single pre-determined overhead absorption rate is used for both fixed and variable overheads, based on budgeted machine hours. During the year, the department actually worked 19,500 machine hours. Actual fixed production overheads were ₹8,30,000 and actual variable production overheads were ₹5,70,000. The production manager is reviewing the under- or over-absorption of overheads. It was further determined that 60% of the net under- or over-absorption was due to abnormal defective production planning, while the remaining 40% was attributable to normal cost increase. The company follows the policy of transferring abnormal under- or over-absorption to Costing Profit and Loss Account and adjusting the normal portion through a supplementary rate to cost of sales, finished goods and work-in-progress. You are required to answer the following MCQs based on the above data.
What is the pre-determined fixed overhead absorption rate per machine hour?
₹40 (correct answer)
₹35
₹45
₹50
Answer: A — ₹40
Explanation. Fixed overhead absorption rate = Budgeted fixed overheads ÷ Budgeted machine hours = ₹8,00,000 ÷ 20,000 hours = ₹40 per machine hour. Option c would arise if ₹9,00,000 were used as numerator. Option b would arise if actual machine hours were used as denominator.
Where it goes wrong. Dividing budgeted fixed overheads by actual machine hours instead of budgeted hours.
Question 6 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
What is the total amount of production overhead absorbed during the year?
₹13,30,000
₹13,65,000 (correct answer)
₹14,00,000
₹13,95,000
Answer: B — ₹13,65,000
Explanation. Total predetermined rate = Fixed rate ₹40 + Variable rate ₹30 = ₹70 per machine hour. Absorbed overhead = Actual machine hours × predetermined rate = 19,500 × ₹70 = ₹13,65,000. Option c is the actual overhead incurred, not absorbed. Option a uses ₹68 per hour.
Where it goes wrong. Using actual overhead incurred or omitting the variable overhead rate.
Question 7 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
What is the amount and nature of under- or over-absorption of production overheads?
₹35,000 over-absorbed
₹15,000 over-absorbed
₹35,000 under-absorbed (correct answer)
₹50,000 under-absorbed
Answer: C — ₹35,000 under-absorbed
Explanation. Actual total overhead = ₹8,30,000 fixed + ₹5,70,000 variable = ₹14,00,000. Absorbed overhead = 19,500 × ₹70 = ₹13,65,000. Since absorbed is less than actual, under-absorption = ₹14,00,000 − ₹13,65,000 = ₹35,000. Option b incorrectly nets only the variable over-absorption of ₹15,000.
Where it goes wrong. Considering only fixed or only variable overhead and ignoring the net effect.
Question 8 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
How much of the net under- or over-absorption is transferred to Costing Profit and Loss Account?
₹14,000
₹24,000
₹35,000
₹21,000 (correct answer)
Answer: D — ₹21,000
Explanation. Net under-absorption is ₹35,000. 60% is due to abnormal defective production planning. Amount transferred to Costing P&L A/c = ₹35,000 × 60% = ₹21,000. Option a is 40% of ₹35,000, which is the normal portion to be adjusted through supplementary rate.
Where it goes wrong. Interchanging the abnormal and normal percentages, or transferring the whole amount.
Question 9 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. Orion Ceramics Ltd has two production departments, Kiln (K) and Glazing (G), and two service departments, Maintenance (M) and Quality Control (Q). For the month of May 2026, the following overheads are recorded: factory rent ₹3,60,000; depreciation on factory machinery ₹6,00,000; insurance of stock ₹1,20,000; administrative salaries ₹2,40,000; sales commission ₹1,80,000. The following data are available. Kiln: floor area 6,000 sq ft; asset value ₹40 lakh; stock value ₹20 lakh; employees 90; sales ₹50 lakh. Glazing: floor area 4,000 sq ft; asset value ₹30 lakh; stock value ₹15 lakh; employees 60; sales ₹70 lakh. Maintenance: floor area 1,500 sq ft; asset value ₹20 lakh; stock value ₹3 lakh; employees 30; sales nil. Quality Control: floor area 500 sq ft; asset value ₹10 lakh; stock value ₹2 lakh; employees 20; sales nil. Total floor area 12,000 sq ft; total asset value ₹100 lakh; total stock value ₹40 lakh; total employees 200; total sales ₹120 lakh. Factory rent is apportioned on floor area; depreciation on asset value; insurance of stock on stock value; administrative salaries on number of employees; sales commission on sales value. You are required to answer the following MCQs relating to classification and primary distribution of overheads.
What amount of factory rent is apportioned to the Maintenance department (M)?
₹45,000 (correct answer)
₹30,000
₹15,000
₹60,000
Answer: A — ₹45,000
Explanation. Rent rate per sq ft = ₹3,60,000 ÷ 12,000 sq ft = ₹30 per sq ft. Maintenance area is 1,500 sq ft. Rent to Maintenance = 1,500 × ₹30 = ₹45,000. Option c is Quality Control rent, and option d is Glazing rent.
Where it goes wrong. Using Quality Control or Glazing floor area instead of Maintenance area.
Question 10 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
What amount of depreciation on factory machinery is apportioned to the Glazing department (G)?
₹1,20,000
₹1,80,000 (correct answer)
₹2,40,000
₹1,50,000
Answer: B — ₹1,80,000
Explanation. Depreciation rate per ₹ lakh of asset value = ₹6,00,000 ÷ ₹100 lakh = ₹6,000 per lakh. Glazing asset value is ₹30 lakh. Depreciation to Glazing = 30 × ₹6,000 = ₹1,80,000. Option c uses Kiln asset value of ₹40 lakh; option a uses Maintenance asset value of ₹20 lakh.
Where it goes wrong. Using another department asset value or total asset value instead of Glazing asset value.
Question 13 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. A factory budgets production overheads of ₹4,50,000 and direct wages of ₹7,50,000. It absorbs overheads as a percentage of direct wages. If Job No. 77 incurs direct wages of ₹36,000, what overhead is absorbed by the job?
A factory budgets production overheads of ₹4,50,000 and direct wages of ₹7,50,000. It absorbs overheads as a percentage of direct wages. If Job No. 77 incurs direct wages of ₹36,000, what overhead is absorbed by the job?
₹21,600 (correct answer)
₹18,000
₹24,000
₹27,000
Answer: A — ₹21,600
Explanation. Overhead absorption rate = ₹4,50,000 ÷ ₹7,50,000 × 100 = 60% of direct wages. Overhead absorbed by Job No. 77 = ₹36,000 × 60% = ₹21,600. Option b uses 50%, option c uses 66.67%, and option d uses 75%.
Where it goes wrong. Using direct material or prime cost as the base instead of direct wages.
Question 14 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
Scenario. Machining department overheads are ₹3,60,000 for 24,000 budgeted machine hours. Assembly department overheads are ₹2,40,000 for 16,000 budgeted direct labour hours. Job X uses 90 machine hours in Machining and 120 direct labour hours in Assembly. What is the total overhead absorbed by Job X?
Machining department overheads are ₹3,60,000 for 24,000 budgeted machine hours. Assembly department overheads are ₹2,40,000 for 16,000 budgeted direct labour hours. Job X uses 90 machine hours in Machining and 120 direct labour hours in Assembly. What is the total overhead absorbed by Job X?
₹2,700
₹3,150 (correct answer)
₹3,000
₹3,300
Answer: B — ₹3,150
Explanation. Machining rate = ₹3,60,000 ÷ 24,000 = ₹15 per machine hour; overhead = 90 × ₹15 = ₹1,350. Assembly rate = ₹2,40,000 ÷ 16,000 = ₹15 per labour hour; overhead = 120 × ₹15 = ₹1,800. Total overhead = ₹1,350 + ₹1,800 = ₹3,150. Option a ignores Assembly overhead.
Where it goes wrong. Applying the same hours to both departments or omitting one department rate.
Question 15 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. Budgeted fixed overheads are ₹5,40,000 for normal output of 18,000 units. Actual output is 17,400 units and actual fixed overheads are ₹5,31,000. What is the fixed overhead under- or over-absorption?
Budgeted fixed overheads are ₹5,40,000 for normal output of 18,000 units. Actual output is 17,400 units and actual fixed overheads are ₹5,31,000. What is the fixed overhead under- or over-absorption?
₹9,000 over-absorbed
₹21,000 under-absorbed
₹9,000 under-absorbed (correct answer)
₹30,000 under-absorbed
Answer: C — ₹9,000 under-absorbed
Explanation. Fixed overhead rate = ₹5,40,000 ÷ 18,000 units = ₹30 per unit. Absorbed fixed overhead = 17,400 × ₹30 = ₹5,22,000. Actual fixed overhead = ₹5,31,000. Under-absorption = ₹5,31,000 − ₹5,22,000 = ₹9,000. Option b arises from comparing actual output with normal capacity only.
Where it goes wrong. Ignoring the actual fixed overhead figure and comparing only output levels.
Question 16 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
Scenario. Actual overheads are ₹6,80,000 and absorbed overheads are ₹6,50,000. Production is 15,000 units, of which 12,000 units are sold and 3,000 units are in closing finished goods. The entire under-absorption is due to normal cost increase. What amount is charged to Cost of Sales through the supplementary rate?
Actual overheads are ₹6,80,000 and absorbed overheads are ₹6,50,000. Production is 15,000 units, of which 12,000 units are sold and 3,000 units are in closing finished goods. The entire under-absorption is due to normal cost increase. What amount is charged to Cost of Sales through the supplementary rate?
₹6,000
₹30,000
₹20,000
₹24,000 (correct answer)
Answer: D — ₹24,000
Explanation. Under-absorption = ₹6,80,000 − ₹6,50,000 = ₹30,000. Supplementary rate = ₹30,000 ÷ 15,000 units = ₹2 per unit. Amount charged to Cost of Sales = 12,000 units sold × ₹2 = ₹24,000. Option a is the amount for closing finished goods (3,000 × ₹2).
Where it goes wrong. Charging the whole under-absorption to cost of sales or using total production units for the sold quantity.
Question 17 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. A machine has monthly fixed standing charges of ₹1,20,000 and operates for 1,500 machine hours per month. Variable running cost is ₹45 per machine hour. What is the comprehensive machine hour rate?
A machine has monthly fixed standing charges of ₹1,20,000 and operates for 1,500 machine hours per month. Variable running cost is ₹45 per machine hour. What is the comprehensive machine hour rate?
₹125 (correct answer)
₹80
₹45
₹120
Answer: A — ₹125
Explanation. Fixed machine hour rate = ₹1,20,000 ÷ 1,500 hours = ₹80 per hour. Variable machine hour rate = ₹45 per hour. Comprehensive machine hour rate = ₹80 + ₹45 = ₹125 per hour. Option b is only the fixed portion; option c is only the variable portion.
Where it goes wrong. Forgetting to add fixed and variable components, or adding total fixed cost without dividing by hours.
Question 18 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
Scenario. A plant has installed capacity of 80,000 units, practical capacity of 72,000 units, normal capacity of 68,000 units and actual capacity utilisation of 64,000 units. What is the abnormal idle capacity?
A plant has installed capacity of 80,000 units, practical capacity of 72,000 units, normal capacity of 68,000 units and actual capacity utilisation of 64,000 units. What is the abnormal idle capacity?
8,000 units
4,000 units (correct answer)
12,000 units
16,000 units
Answer: B — 4,000 units
Explanation. Normal idle capacity = Installed capacity − Normal capacity = 80,000 − 68,000 = 12,000 units. Abnormal idle capacity = Normal capacity − Actual capacity = 68,000 − 64,000 = 4,000 units. Option d is installed capacity minus actual capacity, which is total idle capacity, not abnormal idle capacity.
Where it goes wrong. Computing installed capacity minus actual capacity and calling it abnormal idle capacity.
Question 19 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. Which of the following is classified as a production overhead?
Which of the following is classified as a production overhead?
Depreciation of office building
Commission paid to salesmen
Salary paid to factory supervisor (correct answer)
Cold storage expenses for finished goods
Answer: C — Salary paid to factory supervisor
Explanation. Salary paid to a factory supervisor is an indirect cost incurred for factory supervision and is therefore a production overhead. Depreciation of office building is administrative overhead; salesmen commission is selling overhead; cold storage for finished goods is distribution overhead. Option a and b are often misclassified if function is not identified.
Where it goes wrong. Classifying all salaries as administrative or all storage costs as production overhead.
Question 20 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
Scenario. Stores department overheads are ₹1,20,000. Materials issued are: Production Department P1 ₹3,00,000; Production Department P2 ₹2,00,000; Service Department S1 ₹1,00,000. Stores overheads are apportioned on the basis of value of materials issued. What amount is apportioned to P2?
Stores department overheads are ₹1,20,000. Materials issued are: Production Department P1 ₹3,00,000; Production Department P2 ₹2,00,000; Service Department S1 ₹1,00,000. Stores overheads are apportioned on the basis of value of materials issued. What amount is apportioned to P2?
₹30,000
₹50,000
₹60,000
₹40,000 (correct answer)
Answer: D — ₹40,000
Explanation. Total materials issued = ₹3,00,000 + ₹2,00,000 + ₹1,00,000 = ₹6,00,000. P2 share = ₹2,00,000 ÷ ₹6,00,000 = 1/3. Stores overhead to P2 = ₹1,20,000 × 1/3 = ₹40,000. Option b excludes the service department issue and uses ₹5,00,000 as base.
Where it goes wrong. Excluding service department materials from the apportionment base.
Question 21 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. A company absorbs factory overheads at 40% of direct material cost. Direct labour cost is 50% of direct material cost. What is the equivalent overhead absorption rate as a percentage of prime cost?
A company absorbs factory overheads at 40% of direct material cost. Direct labour cost is 50% of direct material cost. What is the equivalent overhead absorption rate as a percentage of prime cost?
26.67% (correct answer)
40.00%
20.00%
60.00%
Answer: A — 26.67%
Explanation. Let direct material = ₹100. Overhead = 40% × ₹100 = ₹40. Direct labour = 50% × ₹100 = ₹50. Prime cost = ₹100 + ₹50 = ₹150. Prime cost overhead rate = ₹40 ÷ ₹150 × 100 = 26.67%. Option b simply repeats the material cost rate, ignoring labour in the base.
Where it goes wrong. Using direct material as the denominator instead of prime cost.
Question 22 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
Scenario. Budgeted overheads are ₹8,40,000 and budgeted machine hours are 42,000. Actual machine hours worked are 40,000 and actual overheads are ₹8,10,000. What is the amount of under- or over-absorption?
Budgeted overheads are ₹8,40,000 and budgeted machine hours are 42,000. Actual machine hours worked are 40,000 and actual overheads are ₹8,10,000. What is the amount of under- or over-absorption?
₹10,000 over-absorbed
₹10,000 under-absorbed (correct answer)
₹30,000 under-absorbed
₹40,000 under-absorbed
Answer: B — ₹10,000 under-absorbed
Explanation. Predetermined rate = ₹8,40,000 ÷ 42,000 hours = ₹20 per machine hour. Overhead absorbed = 40,000 × ₹20 = ₹8,00,000. Actual overhead = ₹8,10,000. Since absorbed is lower, under-absorption = ₹8,10,000 − ₹8,00,000 = ₹10,000. Option a reverses under and over.
Where it goes wrong. Comparing budgeted overhead with actual overhead and ignoring absorbed overhead.
Question 23 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. A service department has total overheads of ₹1,20,000. It renders services to production departments P1, P2 and P3 in the ratio 40%, 35% and 25% respectively. Under the direct re-distribution method, what amount is apportioned to P2?
A service department has total overheads of ₹1,20,000. It renders services to production departments P1, P2 and P3 in the ratio 40%, 35% and 25% respectively. Under the direct re-distribution method, what amount is apportioned to P2?
₹48,000
₹36,000
₹42,000 (correct answer)
₹30,000
Answer: C — ₹42,000
Explanation. Under the direct re-distribution method, service department costs are apportioned only to production departments. P2 share = 35% of ₹1,20,000 = ₹42,000. Option a is P1 share at 40%; option d is P3 share at 25%.
Where it goes wrong. Using reciprocal distribution or the wrong department percentage.
Question 24 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
Scenario. Which statement about a blanket overhead rate is correct?
Which statement about a blanket overhead rate is correct?
It should be used when products consume departmental resources in significantly different proportions.
It is always more accurate than departmental overhead rates.
It is computed by dividing total factory overheads by total direct material cost only.
It is appropriate when a single major product is produced or when all products pass through all departments for the same time. (correct answer)
Answer: D — It is appropriate when a single major product is produced or when all products pass through all departments for the same time.
Explanation. A blanket overhead rate uses one factory-wide rate. It is suitable where only one major product is produced, or where several products pass through all departments and are processed for the same length of time in each department. Option a describes a situation requiring departmental rates; option b is false because blanket rates can distort product costs.
Where it goes wrong. Assuming one factory-wide rate is always better or always based on direct material.
Question 25 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. A machine costs ₹12,00,000, has a scrap value of ₹60,000 and a useful life of 6 years. It is expected to run for 3,800 hours per year. What is the depreciation per machine hour under the straight-line time basis?
A machine costs ₹12,00,000, has a scrap value of ₹60,000 and a useful life of 6 years. It is expected to run for 3,800 hours per year. What is the depreciation per machine hour under the straight-line time basis?
₹50 (correct answer)
₹45
₹60
₹38
Answer: A — ₹50
Explanation. Depreciable amount = ₹12,00,000 − ₹60,000 = ₹11,40,000. Annual depreciation = ₹11,40,000 ÷ 6 years = ₹1,90,000. Depreciation per machine hour = ₹1,90,000 ÷ 3,800 hours = ₹50 per hour. Option c ignores scrap value; option d uses a wrong life or hours base.
Where it goes wrong. Ignoring scrap value or dividing total cost by total hours over life without annualising correctly.
What does this Chapter 4: Overheads: Absorption Costing Method - Test 1 practice test cover?
This practice test carries 50 marks across 25 questions covering core costing principles, cost accounting standards, formulas, mathematical models, and practical ICAI case scenarios.
How many questions are there and what is the time limit?
There are 25 questions carrying 2 marks each, giving a maximum score of 50 marks in 60 minutes with no negative marking.
Which study material and syllabus apply to these questions?
Questions strictly reflect the official ICAI Study Material for CA Intermediate Paper 4 Cost and Management Accounting for the 2027 examination sessions.
Can I sit this test in both exam and practice modes?
Yes. Practice mode gives immediate answers with mathematical step-by-step workings and trap explanations after each question. Exam mode simulates actual exam conditions with a live timer and issues a downloadable performance certificate.
