Help with absorbed overheads

System · March 2004

I'm tryin to do the Dec 03 ECR paper and i'm not too sure about one of the questions. Explain how the under or over absorbed production overheads for the cutting and finishing departments will be recorded in the profit and loss account. I know that the cutting dep't is under and the finishing dep't is over but i don't know how it would be shown on the P&L. If anyone could explain how its shown and possibly why if it's not real obvious i'd really apreciate it.

System · March 2004

Help with absorbed overheads

I assume you are familiar with the whole absorption costing process and how to determine the cost per unit using absorption costing. Secondly, I assume you have performed all the necessary calculation ie allocation, apportining, re-apportioning and absorbing (charging the cost from cost centre - in total, to cost units). I am therefore not going to go through the question because I have not looked at it. However I will explain the accounting treatment for under/overhead absortion of overheads using an explain. Say BAT Ltd had the following info. for the previous period Budgeted data - pre-determined Output (units) 20,000 Overhead cost $90,000 Actual results Output (units) 32,000 Overhead cost $95,000 And you were asked to prepare the accounting treatment. We would: 1. Calculate the overhead absortion rate using the budgeted or pre-determined figures. In this case; OAR = $90,000/20,000 = $30 per unit 2. Determine whether the overheads have been under or over absorbed, in which case we will have to make adjustment. To do this we compare overheads incurred and overheads absorbed. The overheads absorbed are (charged to the units which are sold) are charged to the P & L. This will need to be adjusted to reflect the difference to that actually incurred. (Remember we expect overheads incurred to equal overheads absorbed). Under/over absorption of overhead Overhead absorbed ($30 * 32,000) $96,000 Overhead incurred $95,000 Difference $10,000 (over absorbed) Accounting treatment We will have three accounts; 1. The production overhead control account (Cost centre account - will include the sum of all cost centres) This will initially have the overhead absorbed - $96,000 (as a credit) and the actual ($95,000) as a debit. 2. The under/over absorption of overhead account Since overheads were over absorbed - the adjustment need to be made by; Debit the production overhead control account with $10,000 and crediting the under/overhead absorption of overhead account with &10,000. At the end of the period, the under/overhead control account is balanced. Balance if transferred to the P & L ie Dr the account and credit the P & L with the balance ($10,000). In effect the overheads over absorbed reduce the cost of sale in the P & L and increase profits. Why? because over accounting for overheads. I hope this example you gives you an understanding on how to deal with under/over head asorption of overheads. AC

System · April 2004

Help with absorbed overheads

Under absorption means that the overheads absorbed, or charged to production, are less than actual overheads turned out to be. In other words, not enough cost has been charged to P&L, so you need to charge a little more - hence a debit to P&L. Over absorption means the opposite - too much overhead has been absorbed or charged to production/P&L, so the excess must now be "clawed" back - hence a credit to P&L. Hope that helps, Andrew Harrington

Help with absorbed overheads

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