Low activity level causes under-absorption of overheads

Steps:

• Absorbed overheads = (budgeted overheads ÷ budgeted activity) × actual activity.
• Under-absorption arises when absorbed overheads < actual overheads incurred.
• This occurs primarily from low actual activity relative to budgeted activity for fixed overheads.
• Identify the option showing actual activity below budget for a relevant base like machine hours or production units.

Why A is correct:

• Machine hours actual 8000 < budget 10000 reduces absorbed overheads below budgeted level (per absorption costing formula), causing under-absorption if machine hours is the base.

Why the others are wrong:

• B: Actual overheads £8000 < budget £10000 creates favorable expenditure variance, leading to over-absorption.
• C: Production units actual 6000 > budget 5000 increases absorbed overheads, causing over-absorption.
• D: Sales units do not determine overhead absorption, which bases on production activity, not sales.

Final answer: A