Test 4: Overheads: Absorption Costing Method: answer key
This chapter-wise practice test covers Chapter 4: Overheads: Absorption Costing Method - Test 4 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 Precision Ltd has a single production department. For the year 2026-27, budgeted factory overheads are ₹12,00,000 and budgeted machine hours are 60,000. Actual machine hours worked during the year are 58,000. Actual factory overheads incurred are ₹12,32,000. Production for the year is 24,000 units. Sales are 20,000 units. Closing finished goods are 4,000 units. There is no work-in-progress. The company absorbs overheads on the basis of machine hours using a predetermined rate. The under- or over-absorption is considered large enough to require adjustment through a supplementary rate to cost of sales and finished goods. You are required to answer the following MCQs.
What is the predetermined overhead absorption rate per machine hour?
₹18
₹22
₹25
₹20 (correct answer)
Answer: D — ₹20
Explanation. Predetermined overhead rate = Budgeted factory overheads ÷ Budgeted machine hours = ₹12,00,000 ÷ 60,000 hours = ₹20 per machine hour. Option a uses 66,667 hours; option b uses 54,545 hours; option c uses 48,000 hours. The correct rate is ₹20.
Where it goes wrong. Dividing budgeted overheads by actual machine hours instead of budgeted hours.
Question 2 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
What is the amount of under- or over-absorption of factory overheads?
₹72,000 under-absorbed (correct answer)
₹72,000 over-absorbed
₹32,000 under-absorbed
₹1,20,000 under-absorbed
Answer: A — ₹72,000 under-absorbed
Explanation. Overhead absorbed = Actual machine hours × Predetermined rate = 58,000 × ₹20 = ₹11,60,000. Actual overheads = ₹12,32,000. Since absorbed is less than actual, under-absorption = ₹12,32,000 − ₹11,60,000 = ₹72,000. Option b reverses the label; option c uses 56,400 hours; option d uses a wrong actual overhead figure.
Where it goes wrong. Comparing actual overheads with budgeted overheads instead of absorbed overheads.
Question 3 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
What is the supplementary overhead rate per unit for adjusting the under-absorption?
₹2
₹3 (correct answer)
₹4
₹1.50
Answer: B — ₹3
Explanation. Supplementary rate = Under-absorbed overhead ÷ Units produced = ₹72,000 ÷ 24,000 units = ₹3 per unit. Option a uses ₹48,000; option c uses ₹96,000; option d uses 48,000 units in the denominator. The correct rate is ₹3 per unit.
Where it goes wrong. Dividing by units sold instead of units produced.
Question 4 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
What amount of under-absorption is charged to Cost of Sales through the supplementary rate?
₹60,000 (correct answer)
₹12,000
₹72,000
₹48,000
Answer: A — ₹60,000
Explanation. Amount charged to Cost of Sales = Units sold × Supplementary rate = 20,000 units × ₹3 = ₹60,000. Option b is the amount charged to closing finished goods (4,000 × ₹3); option c is the total under-absorption; option d uses 16,000 units.
Where it goes wrong. Charging the entire under-absorption to cost of sales or using production units instead of sold units.
Question 5 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. Apex Polymers Ltd operates in a seasonal industry. Budgeted factory overheads for the year are ₹24,00,000 and budgeted direct labour hours are 1,20,000, giving a predetermined rate of ₹20 per direct labour hour. Actual direct labour hours worked are 1,10,000. Actual factory overheads incurred are ₹23,00,000. Of the total under- or over-absorption, 20% is attributable to an unexpected machine breakdown, which is considered abnormal. The remaining is due to seasonal fluctuation in output and is to be adjusted through a supplementary rate. Production for the year is 40,000 units. Sales are 35,000 units. Closing finished goods are 5,000 units. There is no work-in-progress. You are required to answer the following MCQs.
What is the predetermined overhead absorption rate per direct labour hour?
₹18
₹22
₹20 (correct answer)
₹25
Answer: C — ₹20
Explanation. Predetermined overhead rate = Budgeted factory overheads ÷ Budgeted direct labour hours = ₹24,00,000 ÷ 1,20,000 = ₹20 per direct labour hour. Option a uses 1,33,333 hours; option b uses 1,09,091 hours; option d uses 96,000 hours. The correct rate is ₹20.
Where it goes wrong. Using actual direct labour hours as the denominator.
Question 6 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
What is the total amount of under- or over-absorption of factory overheads?
₹1,00,000 under-absorbed (correct answer)
₹1,00,000 over-absorbed
₹80,000 under-absorbed
₹1,20,000 under-absorbed
Answer: A — ₹1,00,000 under-absorbed
Explanation. Overhead absorbed = Actual direct labour hours × Predetermined rate = 1,10,000 × ₹20 = ₹22,00,000. Actual overheads = ₹23,00,000. Under-absorption = ₹23,00,000 − ₹22,00,000 = ₹1,00,000. Option b reverses the label; option c uses 1,08,000 hours; option d uses a wrong actual overhead figure.
Where it goes wrong. Comparing actual overheads with budgeted overheads instead of absorbed overheads.
Question 7 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
What amount of under-absorption is treated as abnormal and transferred to Costing Profit and Loss Account?
₹20,000 (correct answer)
₹80,000
₹1,00,000
₹10,000
Answer: A — ₹20,000
Explanation. Total under-absorption = ₹1,00,000. 20% is due to abnormal machine breakdown. Abnormal under-absorption = 20% × ₹1,00,000 = ₹20,000. This amount is transferred to Costing Profit and Loss Account. Option b is the normal portion (80%); option c is the total; option d uses 10%.
Where it goes wrong. Treating the normal portion as abnormal or transferring the entire under-absorption to Costing P&L.
Question 8 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
What is the supplementary overhead rate per unit for the normal portion of under-absorption?
₹2 (correct answer)
₹1.50
₹2.50
₹3
Answer: A — ₹2
Explanation. Normal under-absorption = ₹1,00,000 − ₹20,000 = ₹80,000. Supplementary rate = ₹80,000 ÷ 40,000 units = ₹2 per unit. Option b uses ₹60,000; option c uses ₹1,00,000; option d uses 26,667 units in the denominator.
Where it goes wrong. Using total under-absorption instead of normal portion in the numerator.
Question 9 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. Zenith Consumer Care Ltd absorbs factory overheads on the basis of machine hours. Budgeted overheads are ₹18,00,000 and budgeted machine hours are 90,000, resulting in a predetermined rate of ₹20 per machine hour. Actual machine hours worked are 85,000. Actual factory overheads incurred are ₹18,52,000. This amount includes: obsolete stores written off ₹40,000; wages paid for strike period under an award ₹60,000; and expenses of the previous year booked in the current year ₹20,000. These three items are considered abnormal. Production completed is 15,000 units. Closing work-in-progress is 2,000 units, 50% complete. Sales are 12,000 units. Closing finished goods are 3,000 units. The normal under-absorption is to be adjusted through a supplementary rate over work-in-progress, finished goods, and cost of sales. You are required to answer the following MCQs.
What is the predetermined overhead absorption rate per machine hour?
₹18
₹22
₹20 (correct answer)
₹25
Answer: C — ₹20
Explanation. Predetermined overhead rate = Budgeted overheads ÷ Budgeted machine hours = ₹18,00,000 ÷ 90,000 hours = ₹20 per machine hour. Option a uses 1,00,000 hours; option b uses 81,818 hours; option d uses 72,000 hours. The correct rate is ₹20.
Where it goes wrong. Using actual machine hours as the denominator instead of budgeted hours.
Question 10 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
What is the total amount of under- or over-absorption of factory overheads before separating abnormal items?
₹1,52,000 under-absorbed (correct answer)
₹1,52,000 over-absorbed
₹1,20,000 under-absorbed
₹32,000 under-absorbed
Answer: A — ₹1,52,000 under-absorbed
Explanation. Overhead absorbed = Actual machine hours × Predetermined rate = 85,000 × ₹20 = ₹17,00,000. Actual overheads = ₹18,52,000. Total under-absorption = ₹18,52,000 − ₹17,00,000 = ₹1,52,000. Option b reverses the label; option c omits part of abnormal items; option d is only the normal portion.
Where it goes wrong. Ignoring abnormal items included in actual overheads or comparing with budgeted overheads.
Question 11 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
What amount of abnormal under-absorption is transferred to Costing Profit and Loss Account?
₹32,000
₹1,52,000
₹1,20,000 (correct answer)
₹40,000
Answer: C — ₹1,20,000
Explanation. Abnormal items included in actual overheads: obsolete stores ₹40,000 + strike wages ₹60,000 + prior period expenses ₹20,000 = ₹1,20,000. This abnormal under-absorption is transferred to Costing Profit and Loss Account. Option a is the normal under-absorption; option b is the total under-absorption; option d is only obsolete stores.
Where it goes wrong. Treating all under-absorption as normal or omitting one abnormal item.
Question 13 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. Under-absorption of overheads occurs when:
Under-absorption of overheads occurs when:
Absorbed overheads exceed actual overheads
Absorbed overheads equal actual overheads
Actual overheads exceed budgeted overheads
Absorbed overheads are less than actual overheads (correct answer)
Answer: D — Absorbed overheads are less than actual overheads
Explanation. Under-absorption occurs when the overhead absorbed (recovered) is less than the actual overhead incurred. Over-absorption occurs when absorbed overheads exceed actual overheads. Option a describes over-absorption; option b describes zero variance; option c is a cause but not the definition.
Where it goes wrong. Reversing the definitions of under-absorption and over-absorption.
Question 14 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
Scenario. A company absorbs overheads at ₹15 per labour hour. Actual labour hours worked are 4,200 and actual overheads are ₹64,000. What is the amount of under- or over-absorption?
A company absorbs overheads at ₹15 per labour hour. Actual labour hours worked are 4,200 and actual overheads are ₹64,000. What is the amount of under- or over-absorption?
₹1,000 over-absorbed
₹2,000 under-absorbed
₹1,000 under-absorbed (correct answer)
₹2,000 over-absorbed
Answer: C — ₹1,000 under-absorbed
Explanation. Overhead absorbed = 4,200 hours × ₹15 = ₹63,000. Actual overheads = ₹64,000. Under-absorption = ₹64,000 − ₹63,000 = ₹1,000. Option a reverses the label; option b uses 4,133 hours; option d uses a wrong absorbed amount.
Where it goes wrong. Comparing actual overheads with budgeted overheads instead of absorbed overheads.
Question 15 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. Under-absorbed overhead is ₹24,000. Production is 12,000 units, sales are 9,000 units, and closing finished goods are 3,000 units. What is the supplementary rate per unit?
Under-absorbed overhead is ₹24,000. Production is 12,000 units, sales are 9,000 units, and closing finished goods are 3,000 units. 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 = ₹24,000 ÷ 12,000 units = ₹2 per unit. Option a uses ₹30,000; option b uses ₹18,000; option c uses ₹36,000. The correct rate is ₹2 per unit.
Where it goes wrong. Dividing by units sold instead of units produced.
Question 16 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
Scenario. Using the data in the previous question, what amount of under-absorption is charged to Cost of Sales through the supplementary rate?
Using the data in the previous question, what amount of under-absorption is charged to Cost of Sales through the supplementary rate?
₹6,000
₹24,000
₹18,000 (correct answer)
₹12,000
Answer: C — ₹18,000
Explanation. Amount charged to Cost of Sales = Units sold × Supplementary rate = 9,000 units × ₹2 = ₹18,000. Option a is the amount charged to closing finished goods (3,000 × ₹2); option b is the total under-absorption; option d uses 6,000 units.
Where it goes wrong. Charging the entire under-absorption to cost of sales or using production units.
Question 17 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. A small amount of over-absorbed overhead due to normal reasons should be:
A small amount of over-absorbed overhead due to normal reasons should be:
Transferred to Costing Profit and Loss Account (correct answer)
Carried forward to the next period
Adjusted through a supplementary rate
Ignored in cost accounts
Answer: A — Transferred to Costing Profit and Loss Account
Explanation. If the amount of over- or under-absorption is small, it is transferred to Costing Profit and Loss Account so that individual product costs are not distorted. Large amounts due to normal reasons are adjusted through a supplementary rate; carry forward is used for seasonal fluctuations expected to reverse.
Where it goes wrong. Applying supplementary rate to a small amount or ignoring the variance entirely.
Question 18 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
Scenario. Under-absorption of overheads due to abnormal reasons such as faulty planning should be:
Under-absorption of overheads due to abnormal reasons such as faulty planning should be:
Charged to production cost
Carried forward to the next period
Transferred to Costing Profit and Loss Account (correct answer)
Adjusted through a supplementary rate
Answer: C — Transferred to Costing Profit and Loss Account
Explanation. Abnormal under-absorption arising from avoidable causes such as faulty planning, strikes, or abnormal idle time is not a normal production cost. It should be transferred to Costing Profit and Loss Account as an abnormal loss. Normal under-absorption is adjusted through a supplementary rate.
Where it goes wrong. Charging abnormal under-absorption to production cost or using supplementary rate.
Question 19 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. A company has actual overheads of ₹5,00,000 and absorbed overheads of ₹4,80,000. Production is 10,000 units, sales are 8,000 units, and closing finished goods are 2,000 units. There is no work-in-progress. The under-absorption is due to normal reasons. What amount is adjusted in Cost of Sales through the supplementary rate?
A company has actual overheads of ₹5,00,000 and absorbed overheads of ₹4,80,000. Production is 10,000 units, sales are 8,000 units, and closing finished goods are 2,000 units. There is no work-in-progress. The under-absorption is due to normal reasons. What amount is adjusted in Cost of Sales through the supplementary rate?
₹4,000
₹20,000
₹16,000 (correct answer)
₹12,000
Answer: C — ₹16,000
Explanation. Under-absorption = ₹5,00,000 − ₹4,80,000 = ₹20,000. Supplementary rate = ₹20,000 ÷ 10,000 units = ₹2 per unit. Amount to Cost of Sales = 8,000 units × ₹2 = ₹16,000. Option a is the amount to closing finished goods (2,000 × ₹2); option b is the total under-absorption.
Where it goes wrong. Charging the entire under-absorption to Cost of Sales or using production units.
Question 20 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
Scenario. Which of the following is a cause of under-absorption of overheads?
Which of the following is a cause of under-absorption of overheads?
Actual output exceeds budgeted output
Actual overheads are less than budgeted overheads
Actual output is less than budgeted output (correct answer)
The predetermined overhead rate is set too high
Answer: C — Actual output is less than budgeted output
Explanation. Under-absorption occurs when the actual output (or activity level) is less than budgeted, so the overhead absorbed is less than the actual overhead incurred. Option a causes over-absorption; option b also causes over-absorption; option d would lead to over-absorption, not under-absorption.
Where it goes wrong. Confusing causes of under-absorption with causes of over-absorption.
Question 21 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. Over-absorption of overheads results in:
Over-absorption of overheads results in:
Decrease in cost of production
No effect on cost of production
Increase in profit
Increase in cost of production (correct answer)
Answer: D — Increase in cost of production
Explanation. Over-absorption means the overhead absorbed is more than the actual overhead incurred. This excess is included in product cost, thereby increasing the cost of production and reducing profit. Option a is the opposite; option b is incorrect; option c is incorrect because higher cost reduces profit.
Where it goes wrong. Thinking over-absorption reduces cost because actual overheads are lower.
Question 22 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
Scenario. Under-absorbed overhead is ₹15,000. Production is 15,000 units, sales are 12,000 units, and closing finished goods are 3,000 units. There is no work-in-progress. What is the total amount adjusted through the supplementary rate?
Under-absorbed overhead is ₹15,000. Production is 15,000 units, sales are 12,000 units, and closing finished goods are 3,000 units. There is no work-in-progress. What is the total amount adjusted through the supplementary rate?
₹12,000
₹15,000 (correct answer)
₹3,000
₹18,000
Answer: B — ₹15,000
Explanation. The entire under-absorption of ₹15,000 due to normal reasons is adjusted through the supplementary rate over cost of sales and finished goods. Amount to Cost of Sales = 12,000 × ₹1 = ₹12,000; amount to finished goods = 3,000 × ₹1 = ₹3,000; total = ₹15,000. Option a is only the cost of sales portion.
Where it goes wrong. Adjusting only the cost of sales portion and ignoring finished goods.
Question 23 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. If under-absorbed overhead is due to seasonal fluctuation and is expected to reverse in the next period, the appropriate treatment is to:
If under-absorbed overhead is due to seasonal fluctuation and is expected to reverse in the next period, the appropriate treatment is to:
Transfer to Costing Profit and Loss Account
Adjust through a supplementary rate
Carry forward to the next period (correct answer)
Ignore the variance
Answer: C — Carry forward to the next period
Explanation. Under- or over-absorption arising from seasonal fluctuations that are expected to reverse in the subsequent period may be carried forward to the next period. This avoids distorting product costs of the current period. Small amounts are transferred to Costing P&L; large normal amounts are adjusted via supplementary rate.
Where it goes wrong. Applying supplementary rate to a seasonal variance that is expected to reverse.
Question 24 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
Scenario. Budgeted overheads are ₹6,00,000 and budgeted machine hours are 30,000. Actual machine hours worked are 28,000 and actual overheads are ₹5,80,000. What is the amount of under- or over-absorption?
Budgeted overheads are ₹6,00,000 and budgeted machine hours are 30,000. Actual machine hours worked are 28,000 and actual overheads are ₹5,80,000. What is the amount of under- or over-absorption?
₹20,000 over-absorbed
₹40,000 under-absorbed
₹20,000 under-absorbed (correct answer)
₹40,000 over-absorbed
Answer: C — ₹20,000 under-absorbed
Explanation. Predetermined rate = ₹6,00,000 ÷ 30,000 = ₹20 per machine hour. Overhead absorbed = 28,000 × ₹20 = ₹5,60,000. Actual overhead = ₹5,80,000. Under-absorption = ₹5,80,000 − ₹5,60,000 = ₹20,000. Option a reverses the label; option b uses 30,000 hours; option d uses a wrong rate.
Where it goes wrong. Comparing actual overheads with budgeted overheads instead of absorbed overheads.
Question 25 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. The accounting entry for transferring a small amount of under-absorbed overhead to Costing Profit and Loss Account is:
The accounting entry for transferring a small amount of under-absorbed overhead to Costing Profit and Loss Account is:
Debit Overhead Control Account, Credit Costing Profit and Loss Account
Debit Work-in-Progress Account, Credit Overhead Control Account
Debit Finished Goods Account, Credit Overhead Control Account
Debit Costing Profit and Loss Account, Credit Overhead Control Account (correct answer)
Answer: D — Debit Costing Profit and Loss Account, Credit Overhead Control Account
Explanation. Under-absorbed overhead represents a debit balance in the overhead control account. To close it, Costing Profit and Loss Account is debited and Overhead Control Account is credited. Option a is the reverse entry; options b and c are entries for absorbing overheads into production, not for transferring under-absorption.
Where it goes wrong. Reversing the debit and credit entries for transferring under-absorption.
What does this Chapter 4: Overheads: Absorption Costing Method - Test 4 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.
