Under/Over absorption of overheads

SandyHood Registered, Moderator Posts: 2,034
Here is a response to a pm I received today

I often think of car mechanics.
In the UK I'd take my car in to be fixed and get a quote: £70 per hour plus parts.
That £70 per labour hour may well include overhead absorption at £25 (of the £70) per hour.
If so the mechanic business has somehow forecast how much the overheads are likely to be and forecast the likely number of labour hours, and then divided the £xxx by the lab hrs to get £25 per hour.

At the end of the month, the labour hours are added up, multiplied by the £25 each has absorbed per hour to get the overhead absorbed.
If this is more than the actual cost of overheads in the month, then we have over absorbed, if less we have under absorbed the overhead.
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