Under absorption of overheads

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
I'm having trouble getting my head around this subject and wonder if anyone might be able to give me some pointers. In particular, I need to know the possible causes of under absorption. <BR><BR>In the question I'm stuck on, the overhead absorption rate was calculated on machine hours but there was a significant under absorption despite the estimated machine hours being quite close to the actual machine hours so I was going to suggest calculating the OAR on direct labour hours or direct material cost instead. What else could cause a significant under absorption?<BR><BR>

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  • System
    System Posts: 100,534 🤖 Admin 🤖
    Under absorption of overheads

    An underabsorption can only be caused because EITHER the hours worked (whether the rate is machine based or direct labour hours based) were less than anticipated OR the overheads incurred were greater than anticipated. Switching to another method is not going to solve the basic problem. <BR><BR>Overheads are best absorbed using the method that most closely reflects the way costs are incurred. So if the work is labour intensive use DLH as the basis. If the work is machine intensive use machine hours. Personally I cannot see any good reason to use material cost. <BR><BR> From what you have said the problem appears to be that overheads were greater than anticipated. This suggest poor budgeting.<BR><BR>Graham Blott
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Under absorption of overheads

    Thanks for that Graham.<BR><BR>Seems like I was over analysing the whole thing - the answer was right there in front of me!<BR><BR>Many thanks for your help.

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