Zuma Manufacturing Limited uses direct labour hours to absorb production overheads. For the year ended 31 December 2023, the budgeted production overheads were ₦24,000,000 based on a budgeted activity level of 40,000 direct labour hours. At the end of the period, actual production overheads incurred were ₦25,800,000, and actual direct labour hours worked were 42,500 hours. What was the overhead absorption status for the year?

The Overhead Absorption Rate (OAR) is calculated as Budgeted Overheads divided by Budgeted Hours (₦24,000,000 / 40,000 hours = ₦600 per direct labour hour). Absorbed overheads equal Actual Hours worked multiplied by OAR (42,500 hours × ₦600 = ₦25,500,000). Comparing Actual Overheads (₦25,800,000) to Absorbed Overheads (₦25,500,000) reveals an under-absorption of ₦300,000 because actual expenditure exceeded the amount absorbed into production.