Test 5: Overheads: Absorption Costing Method: answer key
This chapter-wise practice test covers Chapter 4: Overheads: Absorption Costing Method - Test 5 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 Auto Components Ltd operates two production departments: Machining (automated) and Assembly (manual), and two service departments: Maintenance and Quality Control. For the year 2026-27, budgeted overheads are: Machining ₹24,00,000; Assembly ₹16,00,000; Maintenance ₹6,00,000; Quality Control ₹4,00,000. All budgeted overheads are fixed in nature. Budgeted machine hours for Machining are 60,000 and budgeted direct labour hours for Assembly are 80,000. Actual machine hours worked are 55,000 and actual direct labour hours are 75,000. Actual overheads incurred are: Machining ₹25,00,000; Assembly ₹15,50,000. The company also incurred R&D costs of ₹5,00,000, of which 60% relates to basic research (to be treated as administration overhead) and 40% relates to development of a new product (to be deferred and amortised over 5 years). Idle capacity analysis for Machining: installed capacity 70,000 machine hours, normal capacity 65,000 hours, actual usage 55,000 hours. The idle capacity is due to a major machine breakdown for 4,000 hours (abnormal) and seasonal demand fluctuation for 6,000 hours (normal). You are required to answer the following MCQs.
What is the predetermined overhead absorption rate per machine hour for the Machining department?
₹40 (correct answer)
₹45
₹35
₹50
Answer: A — ₹40
Explanation. Predetermined overhead rate = Budgeted overheads ÷ Budgeted machine hours = ₹24,00,000 ÷ 60,000 hours = ₹40 per machine hour. Option b uses 53,333 hours; option c uses 68,571 hours; option d uses 48,000 hours. The correct rate is ₹40.
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 overheads in the Assembly department?
₹50,000 over-absorbed
₹40,000 under-absorbed
₹50,000 under-absorbed (correct answer)
₹60,000 under-absorbed
Answer: C — ₹50,000 under-absorbed
Explanation. Predetermined rate for Assembly = ₹16,00,000 ÷ 80,000 DLH = ₹20 per DLH. Overhead absorbed = 75,000 × ₹20 = ₹15,00,000. Actual overhead = ₹15,50,000. Since absorbed is less than actual, under-absorption = ₹15,50,000 − ₹15,00,000 = ₹50,000. Option a reverses the label; option b uses ₹14,60,000; option d uses ₹15,60,000.
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 amount of R&D cost should be charged to the current year's production overhead?
₹3,00,000
₹40,000 (correct answer)
₹2,00,000
₹1,00,000
Answer: B — ₹40,000
Explanation. Development cost = 40% of ₹5,00,000 = ₹2,00,000. It is deferred and amortised over 5 years. Annual charge to production overhead = ₹2,00,000 ÷ 5 = ₹40,000. Basic research of ₹3,00,000 is charged to administration overhead. Option a is basic research; option c is development cost; option d uses 50% of development cost.
Where it goes wrong. Charging the entire development cost to the current year or including basic research in production overhead.
Question 5 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. Zenith Consumer Care Ltd produces three products: A, B and C. Annual sales are: A ₹40,00,000; B ₹30,00,000; C ₹20,00,000. Selling and distribution overheads are: Salesmen salaries ₹5,40,000; Advertisement ₹3,60,000; Warehouse rent ₹3,00,000; Delivery van expenses ₹1,80,000; Commission 5% on sales. Additional data: Number of orders: A 400, B 300, C 200. Weight of goods sold: A 24,000 kg, B 27,000 kg, C 9,000 kg. Units sold: A 12,000, B 9,000, C 9,000. Allocation bases agreed: Salesmen salaries on sales value; Advertisement on sales value; Warehouse rent on weight of goods sold; Delivery van expenses on number of orders; Commission on sales value. You are required to answer the following MCQs.
What is the total selling and distribution overhead for product A?
₹7,20,000
₹8,00,000 (correct answer)
₹6,50,000
₹9,00,000
Answer: B — ₹8,00,000
Explanation. A share of salesmen salaries = (40/90) × ₹5,40,000 = ₹2,40,000. Advertisement = (40/90) × ₹3,60,000 = ₹1,60,000. Warehouse rent = (24,000/60,000) × ₹3,00,000 = ₹1,20,000. Delivery van = (400/900) × ₹1,80,000 = ₹80,000. Commission = 5% × ₹40,00,000 = ₹2,00,000. Total = ₹8,00,000. Option a omits warehouse rent; option c uses wrong commission; option d uses wrong salesmen allocation.
Where it goes wrong. Omitting one of the overhead items or using total sales value of all products instead of product A's sales value.
Question 6 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
What amount of warehouse rent is allocated to product C?
₹60,000
₹1,20,000
₹45,000 (correct answer)
₹30,000
Answer: C — ₹45,000
Explanation. Weight of C = 9,000 kg. Total weight = 24,000 + 27,000 + 9,000 = 60,000 kg. Warehouse rent to C = (9,000/60,000) × ₹3,00,000 = ₹45,000. Option a uses 20% weight; option b uses 40% weight (A); option d uses 10% weight.
Where it goes wrong. Using sales value or number of orders as the base for warehouse rent instead of weight.
Question 8 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
What amount of delivery van expenses is allocated to product B?
₹80,000
₹40,000
₹1,20,000
₹60,000 (correct answer)
Answer: D — ₹60,000
Explanation. Number of orders for B = 300. Total orders = 400 + 300 + 200 = 900. Delivery van expenses to B = (300/900) × ₹1,80,000 = ₹60,000. Option a is A's share (400/900); option b is C's share (200/900); option c uses 600 orders.
Where it goes wrong. Using sales value or weight as the base for delivery van expenses instead of number of orders.
Question 9 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. Apex Polychem Ltd has a production department with normal capacity of 1,00,000 units. Budgeted fixed overheads are ₹10,00,000 and budgeted variable overheads are ₹5 per unit. Actual production is 90,000 units. Actual fixed overheads are ₹10,20,000 and actual variable overheads are ₹4,60,000. The company also incurred research and development costs: basic research ₹2,00,000; applied research for a specific product ₹3,00,000; development costs for a new product ₹5,00,000 (expected to benefit 5 years). The company wants to treat R&D costs appropriately. Idle capacity is due to a strike for 5,000 units (abnormal) and a market slump for 5,000 units (normal). You are required to answer the following MCQs.
What is the fixed overhead absorption rate per unit?
₹10 (correct answer)
₹12
₹8
₹15
Answer: A — ₹10
Explanation. Fixed overhead rate = Budgeted fixed overheads ÷ Normal capacity units = ₹10,00,000 ÷ 1,00,000 units = ₹10 per unit. Option b uses 83,333 units; option c uses 1,25,000 units; option d uses 66,667 units. The correct rate is ₹10.
Where it goes wrong. Using actual production instead of normal capacity as the denominator.
Question 10 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
What is the amount of fixed overhead absorbed?
₹10,00,000
₹9,50,000
₹9,00,000 (correct answer)
₹8,50,000
Answer: C — ₹9,00,000
Explanation. Fixed overhead absorbed = Actual production × Fixed overhead rate = 90,000 units × ₹10 = ₹9,00,000. Option a uses normal capacity; option b uses 95,000 units; option d uses 85,000 units.
Where it goes wrong. Using budgeted output instead of actual production to compute absorbed overhead.
Question 11 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
How should the basic research cost of ₹2,00,000 be treated?
Charged to production overhead
Deferred and amortised over 5 years
Charged to Costing Profit and Loss Account
Treated as administration overhead (correct answer)
Answer: D — Treated as administration overhead
Explanation. Basic research is not related to any specific product or process and is undertaken for general advancement of knowledge. It is treated as an administration overhead and charged to Costing Profit and Loss Account as part of administration costs. Option a is incorrect because it is not a production overhead; option b is for development costs; option c is for abnormal losses.
Where it goes wrong. Treating basic research as a production overhead or deferring it like development costs.
Question 12 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
What is the cost of abnormal idle capacity?
₹1,00,000
₹50,000 (correct answer)
₹1,50,000
₹75,000
Answer: B — ₹50,000
Explanation. Abnormal idle capacity = 5,000 units (strike). Fixed overhead rate = ₹10 per unit. Abnormal idle capacity cost = 5,000 × ₹10 = ₹50,000. This is charged to Costing Profit and Loss Account. Option a is normal idle capacity cost (5,000 × ₹10); option c uses 15,000 units; option d uses 7,500 units.
Where it goes wrong. Including normal idle capacity in abnormal cost or using total idle capacity (10,000 units).
Question 13 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. A company has budgeted overheads of ₹12,00,000 and budgeted direct labour hours of 60,000. Actual hours worked are 55,000 and actual overheads are ₹11,50,000. What is the predetermined overhead absorption rate per direct labour hour?
A company has budgeted overheads of ₹12,00,000 and budgeted direct labour hours of 60,000. Actual hours worked are 55,000 and actual overheads are ₹11,50,000. 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 overheads ÷ Budgeted direct labour hours = ₹12,00,000 ÷ 60,000 = ₹20 per direct labour hour. Option a uses 66,667 hours; option b uses 54,545 hours; option d uses 48,000 hours. The correct rate is ₹20.
Where it goes wrong. Dividing budgeted overheads by actual direct labour hours instead of budgeted hours.
Question 14 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
Scenario. Idle capacity cost due to normal reasons should be:
Idle capacity cost due to normal reasons should be:
Charged to Costing Profit and Loss Account
Absorbed by inflating overhead rate (correct answer)
Carried forward to the next period
Ignored in cost accounts
Answer: B — Absorbed by inflating overhead rate
Explanation. Idle capacity cost due to normal reasons (e.g., routine maintenance, seasonal demand) is a normal cost of production and should be absorbed by inflating the overhead absorption rate. Abnormal idle capacity costs are charged to Costing Profit and Loss Account. Carrying forward is used for seasonal fluctuations expected to reverse.
Where it goes wrong. Charging normal idle capacity to Costing P&L or ignoring it.
Question 15 · 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?
Salary paid to factory supervisor (correct answer)
Commission paid to salesmen
Depreciation of office building
Advertisement expenses
Answer: A — 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. Commission to salesmen is selling overhead; depreciation of office building is administrative overhead; advertisement is selling overhead.
Where it goes wrong. Classifying all salaries as administrative or all depreciation as production overhead.
Question 16 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
Scenario. R&D costs that are expected to benefit future periods and are material should be:
R&D costs that are expected to benefit future periods and are material should be:
Charged to current year's production overhead
Deferred and amortised over the benefit period (correct answer)
Charged to Costing Profit and Loss Account
Treated as administration overhead
Answer: B — Deferred and amortised over the benefit period
Explanation. Development costs that are expected to benefit future periods and are material in amount should be deferred and amortised over the period during which the benefits are expected to accrue. Basic research is charged to administration overhead; applied research may be charged to production or deferred depending on circumstances.
Where it goes wrong. Charging the entire development cost to the current year or treating it as an abnormal loss.
Question 17 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. A company has budgeted overheads of ₹8,00,000 and budgeted machine hours of 40,000. Actual machine hours worked are 38,000 and actual overheads are ₹7,80,000. What is the amount of under- or over-absorption?
A company has budgeted overheads of ₹8,00,000 and budgeted machine hours of 40,000. Actual machine hours worked are 38,000 and actual overheads are ₹7,80,000. What is the amount of under- or over-absorption?
₹20,000 over-absorbed
₹20,000 under-absorbed (correct answer)
₹40,000 under-absorbed
₹40,000 over-absorbed
Answer: B — ₹20,000 under-absorbed
Explanation. Predetermined rate = ₹8,00,000 ÷ 40,000 = ₹20 per machine hour. Overhead absorbed = 38,000 × ₹20 = ₹7,60,000. Actual overhead = ₹7,80,000. Under-absorption = ₹7,80,000 − ₹7,60,000 = ₹20,000. Option a reverses the label; option c uses 40,000 hours; option d uses a wrong rate.
Where it goes wrong. Comparing actual overhead with budgeted overhead instead of absorbed overhead.
Question 18 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
Scenario. A company sells two products, X and Y, with sales values ₹6,00,000 and ₹4,00,000 respectively. Salesmen salaries are ₹1,50,000. If allocated on the basis of sales value, what amount is allocated to product X?
A company sells two products, X and Y, with sales values ₹6,00,000 and ₹4,00,000 respectively. Salesmen salaries are ₹1,50,000. If allocated on the basis of sales value, what amount is allocated to product X?
₹90,000 (correct answer)
₹60,000
₹1,00,000
₹80,000
Answer: A — ₹90,000
Explanation. Total sales = ₹6,00,000 + ₹4,00,000 = ₹10,00,000. X share = (6,00,000/10,00,000) × ₹1,50,000 = 60% × ₹1,50,000 = ₹90,000. Option b is Y's share; option c uses 66.67%; option d uses 53.33%.
Where it goes wrong. Using number of units or weight instead of sales value as the allocation base.
Question 19 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. Which of the following is treated as a distribution overhead?
Which of the following is treated as a distribution overhead?
Salesmen commission
Advertisement cost
Delivery van expenses (correct answer)
Sales office expenses
Answer: C — Delivery van expenses
Explanation. Distribution overheads are costs incurred in making the product available for sale in the market, including delivery, warehousing, and transportation. Delivery van expenses are a distribution overhead. Salesmen commission, advertisement, and sales office expenses are selling overheads.
Where it goes wrong. Confusing selling overhead with distribution overhead, or treating all marketing costs as distribution.
Question 20 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
Scenario. Idle capacity cost due to abnormal reasons such as power failure should be:
Idle capacity cost due to abnormal reasons such as power failure should be:
Charged to production cost
Charged to Costing Profit and Loss Account (correct answer)
Absorbed by inflating overhead rate
Carried forward to the next period
Answer: B — Charged to Costing Profit and Loss Account
Explanation. Idle capacity cost due to abnormal reasons such as power failure, strikes, or faulty planning is not a normal production cost. It should be charged to Costing Profit and Loss Account as an abnormal loss. Normal idle capacity costs are absorbed by inflating the overhead rate.
Where it goes wrong. Charging abnormal idle capacity to production cost or treating it as a normal cost.
Question 21 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. A company has actual overheads of ₹4,50,000 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. What is the supplementary rate per unit for adjusting the over-absorption?
A company has actual overheads of ₹4,50,000 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. What is the supplementary rate per unit for adjusting the over-absorption?
₹3 per unit (correct answer)
₹4 per unit
₹2 per unit
₹5 per unit
Answer: A — ₹3 per unit
Explanation. Over-absorption = ₹4,80,000 − ₹4,50,000 = ₹30,000. Supplementary rate = ₹30,000 ÷ 10,000 units = ₹3 per unit (credit). Option b uses ₹40,000; option c uses 15,000 units; option d uses 6,000 units.
Where it goes wrong. Dividing by units sold instead of units produced, or using under-absorption formula for over-absorption.
Question 22 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
Scenario. A company has normal capacity of 20,000 units and actual production of 18,000 units. Fixed overheads are ₹2,00,000 and variable overheads are ₹5 per unit. Idle capacity is due to normal reasons. What is the amount of fixed overhead absorbed?
A company has normal capacity of 20,000 units and actual production of 18,000 units. Fixed overheads are ₹2,00,000 and variable overheads are ₹5 per unit. Idle capacity is due to normal reasons. What is the amount of fixed overhead absorbed?
₹2,00,000
₹1,80,000 (correct answer)
₹1,90,000
₹1,70,000
Answer: B — ₹1,80,000
Explanation. Fixed overhead rate = ₹2,00,000 ÷ 20,000 units = ₹10 per unit. Fixed overhead absorbed = Actual production × Fixed overhead rate = 18,000 × ₹10 = ₹1,80,000. Option a uses normal capacity; option c uses 19,000 units; option d uses 17,000 units.
Where it goes wrong. Using normal capacity units instead of actual production to compute absorbed overhead.
Question 23 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. Which of the following is an example of administrative overhead?
Which of the following is an example of administrative overhead?
Factory rent
Salesmen salaries
Office salaries (correct answer)
Delivery expenses
Answer: C — Office salaries
Explanation. Administrative overheads are costs incurred on general management and administration of the organisation, such as office salaries, office rent, and audit fees. Factory rent is a production overhead; salesmen salaries are selling overhead; delivery expenses are distribution overhead.
Where it goes wrong. Classifying office salaries as production or selling overhead.
Question 24 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · hard
Scenario. Development costs of ₹10,00,000 for a new product are expected to benefit 4 years. What amount should be charged to production overhead each year?
Development costs of ₹10,00,000 for a new product are expected to benefit 4 years. What amount should be charged to production overhead each year?
₹2,50,000 (correct answer)
₹1,00,000
₹5,00,000
₹10,00,000
Answer: A — ₹2,50,000
Explanation. Development costs are deferred and amortised over the benefit period. Annual charge = ₹10,00,000 ÷ 4 years = ₹2,50,000 per year. Option b uses 10 years; option c uses 2 years; option d charges the entire amount in one year.
Where it goes wrong. Charging the entire development cost in the year of incurrence instead of amortising it.
Question 25 · 2 marks · Chapter 4: Overheads: Absorption Costing Method · medium
Scenario. A company has budgeted overheads of ₹12,00,000 and budgeted machine hours of 80,000. Actual machine hours worked are 78,000 and actual overheads are ₹11,80,000. What is the predetermined overhead absorption rate per machine hour?
A company has budgeted overheads of ₹12,00,000 and budgeted machine hours of 80,000. Actual machine hours worked are 78,000 and actual overheads are ₹11,80,000. What is the predetermined overhead absorption rate per machine hour?
₹20
₹18
₹22
₹15 (correct answer)
Answer: D — ₹15
Explanation. Predetermined overhead rate = Budgeted overheads ÷ Budgeted machine hours = ₹12,00,000 ÷ 80,000 = ₹15 per machine hour. Option a uses 60,000 hours; option b uses 66,667 hours; option c uses 54,545 hours. The correct rate is ₹15.
Where it goes wrong. Dividing budgeted overheads by actual machine hours instead of budgeted hours.
What does this Chapter 4: Overheads: Absorption Costing Method - Test 5 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.
