Test 3: Overheads: Absorption Costing Method: answer key
This chapter-wise practice test covers Chapter 4: Overheads: Absorption Costing Method - Test 3 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. Vikram Steels Ltd operates a machine shop with several machines. The following data relate to Machine No. M-7 for the year 2026-27: Cost of machine ₹10,00,000; scrap value nil; useful life 10 years; working hours per year 2,000. Power consumption 12 units per hour at ₹5 per unit. Repairs and maintenance ₹40,000 per annum. Insurance @ 2% per annum on the cost of machine. The machine occupies 200 sq ft of the total shop area of 1,000 sq ft. Shop rent is ₹1,50,000 per annum. A supervisor is paid ₹40,000 per annum and devotes 25% of his time to this machine. Lubricating oil costs ₹20,000 per annum. An operator is exclusively employed for this machine at an annual wage of ₹80,000. Depreciation is charged on straight-line basis. You are required to compute the comprehensive machine hour rate for Machine No. M-7. The management wants to use this rate for absorbing overheads to jobs processed on this machine. You are required to answer the following MCQs based on the above data.
What is the depreciation per machine hour for Machine No. M-7?
₹50.00 (correct answer)
₹45.00
₹40.00
₹47.50
Answer: A — ₹50.00
Explanation. Annual depreciation = Cost ₹10,00,000 ÷ 10 years = ₹1,00,000. Effective machine hours = 2,000 hours per annum. Depreciation per machine hour = ₹1,00,000 ÷ 2,000 hours = ₹50.00 per hour.
Where it goes wrong. Students often deduct assumed scrap value or divide by working days instead of annual productive hours.
Question 5 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. Apex Polychem Ltd has a machine shop with three identical machines. Budgeted overheads for the machine shop for the year are ₹9,00,000. Budgeted machine hours are 30,000. Actual overheads incurred are ₹9,60,000. Actual machine hours worked are 28,000. The company uses a predetermined machine hour rate based on budgeted machine hours. For one of the machines (Machine A), the following data are available: Cost ₹5,00,000; scrap value ₹20,000; life 5 years; working hours per year 1,000. Power consumption 10 units per hour @ ₹6 per unit. Repairs ₹20,000 per annum. Insurance @ 2% on cost. Rent for the shop ₹1,20,000 per annum; Machine A occupies 250 sq ft out of total 1,000 sq ft. Supervisor salary ₹60,000 per annum; devotes 20% time to Machine A. Operator wages ₹1,00,000 per annum (dedicated). Lubricating oil ₹10,000 per annum. You are required to compute the predetermined machine hour rate, the comprehensive machine hour rate for Machine A, and determine under/over absorption for the machine shop. You are required to answer the following MCQs.
What is the predetermined machine hour rate for the machine shop?
₹30 (correct answer)
₹25
₹35
₹20
Answer: A — ₹30
Explanation. Predetermined machine hour rate = Budgeted overheads ÷ Budgeted machine hours = ₹9,00,000 ÷ 30,000 hours = ₹30 per machine hour. Option b is ₹25, which would result from dividing by 36,000 hours; option c is ₹35 from dividing by 25,714 hours. The correct rate is ₹30.
Where it goes wrong. Dividing budgeted overheads by actual machine hours instead of budgeted hours.
Question 6 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
What is the amount of under- or over-absorption for the machine shop?
₹1,20,000 over-absorbed
₹60,000 under-absorbed
₹1,20,000 under-absorbed (correct answer)
₹60,000 over-absorbed
Answer: C — ₹1,20,000 under-absorbed
Explanation. Overhead absorbed = Actual machine hours × Predetermined rate = 28,000 × ₹30 = ₹8,40,000. Actual overheads = ₹9,60,000. Since absorbed is less than actual, under-absorption = ₹9,60,000 − ₹8,40,000 = ₹1,20,000. Option a reverses the under/over label; option b uses only half the difference.
Where it goes wrong. Comparing actual overheads with budgeted overheads instead of absorbed overheads.
Question 8 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
What amount of overhead is absorbed by Machine A if it works for 1,000 hours?
₹3,00,000
₹3,38,000 (correct answer)
₹3,50,000
₹3,20,000
Answer: B — ₹3,38,000
Explanation. Overhead absorbed by Machine A = Machine hours × Comprehensive machine hour rate = 1,000 hours × ₹338 = ₹3,38,000. Option a uses ₹300 per hour; option c uses ₹350 per hour; option d uses ₹320 per hour, each representing incorrect machine hour rates.
Where it goes wrong. Using the predetermined shop rate of ₹30 instead of the machine-specific rate.
Question 9 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. Zenith Consumer Care Ltd uses a blanket overhead absorption rate based on direct labour hours. Budgeted overheads for the year are ₹12,00,000 and budgeted direct labour hours are 60,000. Actual overheads incurred are ₹12,60,000 and actual direct labour hours worked are 58,000. The company produces two products, A and B. Product A requires 3 direct labour hours per unit and Product B requires 2 direct labour hours per unit. During the year, 8,000 units of A and 12,000 units of B were produced. The selling price is set at total cost plus 20% markup. The management is reviewing the appropriateness of the blanket rate. You are required to answer the following MCQs based on the above data.
What is the predetermined overhead absorption rate per direct labour hour?
₹15
₹25
₹20 (correct answer)
₹30
Answer: C — ₹20
Explanation. Predetermined overhead rate = Budgeted overheads ÷ Budgeted direct labour hours = ₹12,00,000 ÷ 60,000 = ₹20 per direct labour hour. Option a would result from dividing by 80,000 hours; option b from dividing by 48,000 hours; option d from dividing by 40,000 hours.
Where it goes wrong. Using actual direct labour hours as the denominator instead of budgeted hours.
Question 10 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
What is the overhead absorbed per unit of Product A?
₹60 (correct answer)
₹40
₹50
₹70
Answer: A — ₹60
Explanation. Product A requires 3 direct labour hours per unit. Overhead absorption rate is ₹20 per direct labour hour. Overhead absorbed per unit of A = 3 hours × ₹20 = ₹60. Option b uses 2 hours (Product B); option c uses 2.5 hours; option d uses 3.5 hours.
Where it goes wrong. Using the labour hours of Product B or applying the rate to the wrong base.
Question 11 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
What is the amount of under- or over-absorption of overheads for the year?
₹1,00,000 over-absorbed
₹80,000 under-absorbed
₹1,20,000 under-absorbed
₹1,00,000 under-absorbed (correct answer)
Answer: D — ₹1,00,000 under-absorbed
Explanation. Overhead absorbed = Actual direct labour hours × Predetermined rate = 58,000 × ₹20 = ₹11,60,000. Actual overheads = ₹12,60,000. Under-absorption = ₹12,60,000 − ₹11,60,000 = ₹1,00,000. Option a reverses the label; option b uses only 80,000; option c uses 1,20,000.
Where it goes wrong. Comparing actual overheads with budgeted overheads or using the wrong actual hours.
Question 12 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
What is the total overhead absorbed by Product B during the year?
₹3,60,000
₹4,80,000 (correct answer)
₹4,00,000
₹5,00,000
Answer: B — ₹4,80,000
Explanation. Overhead per unit of Product B = 2 direct labour hours × ₹20 = ₹40. Total overhead absorbed by B = 12,000 units × ₹40 = ₹4,80,000. Option a uses 3 hours per unit; option c uses ₹33.33 per unit; option d uses 12,500 units.
Where it goes wrong. Using the labour hours of Product A or multiplying by the wrong number of units.
Question 13 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. A company budgets factory overheads of ₹6,00,000 and direct wages of ₹8,00,000. It absorbs overheads as a percentage of direct wages. If Job X incurs direct wages of ₹50,000, what is the overhead absorbed?
A company budgets factory overheads of ₹6,00,000 and direct wages of ₹8,00,000. It absorbs overheads as a percentage of direct wages. If Job X incurs direct wages of ₹50,000, what is the overhead absorbed?
₹30,000
₹40,000
₹45,000
₹37,500 (correct answer)
Answer: D — ₹37,500
Explanation. Overhead absorption rate = Budgeted overheads ÷ Budgeted direct wages × 100 = ₹6,00,000 ÷ ₹8,00,000 × 100 = 75%. Overhead absorbed by Job X = Direct wages × 75% = ₹50,000 × 75% = ₹37,500. Option a uses 60%; option b uses 80%; option c uses 90%.
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. Budgeted direct material cost is ₹4,00,000 and budgeted factory overheads are ₹1,20,000. Overhead is absorbed as a percentage of direct material cost. If a job uses direct material of ₹30,000, what is the overhead absorbed?
Budgeted direct material cost is ₹4,00,000 and budgeted factory overheads are ₹1,20,000. Overhead is absorbed as a percentage of direct material cost. If a job uses direct material of ₹30,000, what is the overhead absorbed?
₹9,000 (correct answer)
₹6,000
₹12,000
₹15,000
Answer: A — ₹9,000
Explanation. Overhead absorption rate = ₹1,20,000 ÷ ₹4,00,000 × 100 = 30% of direct material cost. Overhead absorbed = ₹30,000 × 30% = ₹9,000. Option b uses 20%; option c uses 40%; option d uses 50%.
Where it goes wrong. Using direct labour cost as the base or applying the rate to prime cost.
Question 16 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
Scenario. A department has budgeted overheads of ₹2,40,000 and budgeted direct labour hours of 12,000. Actual direct labour hours worked are 11,500. What is the overhead absorbed?
A department has budgeted overheads of ₹2,40,000 and budgeted direct labour hours of 12,000. Actual direct labour hours worked are 11,500. What is the overhead absorbed?
₹2,40,000
₹2,30,000 (correct answer)
₹2,20,000
₹2,50,000
Answer: B — ₹2,30,000
Explanation. Overhead absorption rate = ₹2,40,000 ÷ 12,000 = ₹20 per direct labour hour. Overhead absorbed = Actual hours × Rate = 11,500 × ₹20 = ₹2,30,000. Option a uses budgeted hours; option c uses 11,000 hours; option d uses 12,500 hours.
Where it goes wrong. Using budgeted hours instead of actual hours to compute absorbed overhead.
Question 18 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
Scenario. A machine costs ₹8,00,000, has a scrap value of ₹40,000 and a useful life of 8 years. It is expected to run for 1,900 hours per year. What is the depreciation per machine hour under straight-line method?
A machine costs ₹8,00,000, has a scrap value of ₹40,000 and a useful life of 8 years. It is expected to run for 1,900 hours per year. What is the depreciation per machine hour under straight-line method?
₹50 (correct answer)
₹48
₹52
₹45
Answer: A — ₹50
Explanation. Depreciation per annum = (₹8,00,000 − ₹40,000) ÷ 8 = ₹7,60,000 ÷ 8 = ₹95,000. Depreciation per machine hour = ₹95,000 ÷ 1,900 = ₹50. Option b uses 2,000 hours; option c uses ₹7,90,000 as depreciable amount; option d uses 2,100 hours.
Where it goes wrong. Ignoring scrap value or using total cost instead of depreciable amount.
Question 19 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. A company absorbs overheads at a predetermined rate of ₹25 per machine hour. Actual machine hours worked were 8,000 and actual overheads were ₹2,10,000. What is the under/over absorption?
A company absorbs overheads at a predetermined rate of ₹25 per machine hour. Actual machine hours worked were 8,000 and actual overheads were ₹2,10,000. What is the under/over absorption?
₹10,000 over-absorbed
₹15,000 under-absorbed
₹10,000 under-absorbed (correct answer)
₹5,000 over-absorbed
Answer: C — ₹10,000 under-absorbed
Explanation. Overhead absorbed = 8,000 hours × ₹25 = ₹2,00,000. Actual overhead = ₹2,10,000. Under-absorption = ₹2,10,000 − ₹2,00,000 = ₹10,000. Option a reverses the label; option b uses ₹15,000; option d uses ₹5,000.
Where it goes wrong. Comparing actual overhead with budgeted overhead instead of absorbed overhead.
Question 20 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
Scenario. Under-absorbed overhead is ₹20,000. Production is 10,000 units of which 8,000 are sold and 2,000 are in closing stock. The under-absorption is due to normal reasons. What is the supplementary rate per unit?
Under-absorbed overhead is ₹20,000. Production is 10,000 units of which 8,000 are sold and 2,000 are in closing stock. The under-absorption is due to normal reasons. What is the supplementary rate per unit?
₹2.50
₹1.50
₹3
₹2 (correct answer)
Answer: D — ₹2
Explanation. Supplementary rate = Under-absorbed overhead ÷ Units produced = ₹20,000 ÷ 10,000 units = ₹2 per unit. Option a uses ₹25,000; option b uses ₹15,000; option c uses ₹30,000.
Where it goes wrong. Dividing by units sold instead of units produced.
Question 21 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. Which of the following costs is treated as a standing charge in a comprehensive machine hour rate?
Which of the following costs is treated as a standing charge in a comprehensive machine hour rate?
Power
Depreciation (correct answer)
Repairs
Lubricating oil
Answer: B — Depreciation
Explanation. Standing charges are fixed costs that remain constant irrespective of machine usage. Depreciation (time-based) is a fixed cost. Power, repairs, and lubricating oil vary with machine operation and are treated as variable machine expenses. Option a, c, and d are variable costs.
Where it goes wrong. Classifying all machine-related costs as variable, or treating lubricating oil as fixed.
Question 22 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
Scenario. Idle capacity cost due to abnormal reasons such as faulty planning should be:
Idle capacity cost due to abnormal reasons such as faulty planning should be:
Charged to Costing Profit and Loss Account (correct answer)
Charged to production cost
Absorbed by inflating overhead rate
Treated as deferred revenue expenditure
Answer: A — Charged to Costing Profit and Loss Account
Explanation. Idle capacity cost due to avoidable or abnormal reasons such as faulty planning, power failure, etc. is not a normal production cost. It should be charged to Costing Profit and Loss Account as an abnormal loss. Normal idle capacity costs may be absorbed by inflating overhead rates.
Where it goes wrong. Charging abnormal idle capacity to production cost or treating it as a deferred expense.
Question 23 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. The capacity that is actually utilised after adjusting for normal idle time is known as:
The capacity that is actually utilised after adjusting for normal idle time is known as:
Installed capacity
Normal capacity
Actual capacity
Practical capacity (correct answer)
Answer: D — Practical capacity
Explanation. Practical capacity is the actually utilised capacity of a plant after accounting for normal losses such as repairs, maintenance, minor breakdowns, idle time, set-up time, and normal delays. Installed capacity is the maximum theoretical capacity; normal capacity is the average achievable over a period; actual capacity is what is actually achieved.
Where it goes wrong. Confusing practical capacity with normal capacity or installed capacity.
Question 24 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
Scenario. A blanket overhead rate is most appropriate when:
A blanket overhead rate is most appropriate when:
Products consume departmental resources in different proportions
The company has multiple departments with varying overheads
Only one major product is produced (correct answer)
Different products pass through different departments
Answer: C — Only one major product is produced
Explanation. A blanket overhead rate uses a single factory-wide rate. It is suitable when only one major product is produced, or when all products pass through all departments and consume resources uniformly. Options a, b, and d describe situations where departmental rates are more appropriate.
Where it goes wrong. Assuming a blanket rate is always better or suitable for diversified product lines.
Question 25 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. Over-absorbed overheads result when:
Over-absorbed overheads result when:
Actual overheads exceed absorbed overheads
Absorbed overheads exceed actual overheads (correct answer)
Actual overheads equal absorbed overheads
There is no under-absorption
Answer: B — Absorbed overheads exceed actual overheads
Explanation. Over-absorption occurs when the overhead absorbed (recovered) is more than the actual overhead incurred. Under-absorption occurs when absorbed overheads are less than actual overheads. Option a describes under-absorption; option c describes zero variance.
Where it goes wrong. Reversing the definitions of under-absorption and over-absorption.
What does this Chapter 4: Overheads: Absorption Costing Method - Test 3 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.
