Financial Performance - Overheads absorption.

JohnPj

Hey guys, I'm rather confused about absorbing fixed costs. I know to get the OAR we divide the BUDGETED O/H/ basis on which its absorbed,usually hours.
However to know if we have over or under absorbed ? Do we get the standard for actual fixed costs - actual overheads ????

Also I got this question which totally through me off...

During december there was OVER absorption of fixed overheads of 25,000£. Actual fixed o/h in Dec was 551,000.. What was actual fixed overheads in December ? ...

HELP!! have my exam soon and I fear of failing this one

PeterC

If your OAR is based on labour hours, then the overhead absorbed is OAR X ACTUAL HOURS.
Compare this with the ACTUAL OVERHEAD

eg.
OAR = £10/labour hour
Hours worked last month = 400
Actual overhead last month = ££3,900

Over-absorption = (10 x 400) - 3,900 = £100

I don't think the question you quote should be exactly as you have presented it.

Perhaps is should be:
During december there was OVER absorption of fixed overheads of 25,000£. Fixed o/h absorbed in Dec was 551,000.. What was actual fixed overheads in December ?

The answer would then be
Actual overhead = Overhead absorbed - over absorption = 551,000 - 25,000 = 526,000

JohnPj

Thank you for that ! However the exam Question is like that and the answer we add the over to the actual December :;

SandyHood

JohnPj

The question you wrote is
During december there was OVER absorption of fixed overheads of 25,000£. Actual fixed o/h in Dec was 551,000.. What was actual fixed overheads in December ? ...

As you can see it says the Actual fixed o/h in Dec was 551,000 and What was actual fixed overheads in December ?

I'm going to make a guess that you meant to write:
During december there was OVER absorption of fixed overheads of 25,000£. Actual fixed o/h in Dec was 551,000.. What was absorbed fixed overheads in December ? ...


If that is what you intended to write, you know that the overheads incurred were lower than the overhead absorbed and the difference was £25,000.
On that basis the overhead absorbed would be £551,000 + £25,000 = £576,000

Does that agree with what you were looking for?

Sandy
www.sandyhood.com
sandy@sandyhood.com

JohnPj

Thanks sandy ! I was gettin confused as I was thinkin if budgeted was lower than actual , that was an over absorption. But it's if budgeted is more than actual then it's an over asborption ( correct me I'm I'm wrong )

SandyHood

John
I must correct you.
If we have over absorbed overhead it is because the labour hours worked x the overhead absorption rate is more than the actual cost.
Please only use budgeted overhead cost and budgeted labour hours to set the OAR. Once that has been done, don't go back to those budgeted totals.
This is an area other people find tricky. You are not alone.
But stick to this
Overhead absorbed
less overhead cost incurred
= over/(under) absorbed overhead

And overhead absorbed is (using my garage example) mechanics' hours x overhead absorption rate per hour.

There are two causes of over/(under) absorption, but you must master this aspect before you consider them
Sandy

Here is a link to another post I have made recently on this topic. This is based on a garage (hence my reference to garages above).
http://forums.aat.org.uk/discussion/comment/447319/#Comment_447319

SandyHood

The two causes of overheads being over or under asbsorbed

1. The Actual Overhead cost is much higher (or lower) than Budgeted
   In standard costing this is called the Fixed Overhead Expenditure Variance
   
2. The standard hours produced (units produced x standard time per unit) are more or less than the budgeted hours
   In standard costing this is called the Fixed Overhead Volume Variance