overhead absorption under/over absorbed

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Help I seem to have a mental block and can not get my head round this can anyone explain it to me clearly.<BR>Thanks

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  • System
    System Posts: 100,534 🤖 Admin 🤖
    overhead absorption under/over absorbed

    Overhead absorption is using a predetermined absorption rate based on budget data to allocate overheads to cost units.<BR><BR>The over and under comes in at the end of the month when you have the actual overheads incurred. For example <BR><BR>Total budget overheads for cutting = £24,000<BR>Total budget machine hours = 4,500<BR>Actual OVerheads incurred £24,125<BR>Total actual machine hours = 4,555<BR><BR>You work out at the beginning of the month your predetermined rate = <BR>£24,000/4,500=£5.33<BR><BR>Your absorbed for the month is £5.33x,4,555=£24,278<BR><BR>Absorbed over heads = £24,278<BR>less <BR>Actuals = £24,125<BR>=over absorbtion of £153.00<BR><BR>How to adjust: any under or over asborption would be debit or credit Profit and loss, and debit or credit production overheads account<BR><BR>In this case Debit Production overheads<BR> Credit Profit and loss account<BR>
  • System
    System Posts: 100,534 🤖 Admin 🤖
    overhead absorption under/over absorbed

    Thanks for the help. Hope it helps me to understand better.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    overhead absorption under/over absorbed

    I am absolutely loving my little formula for remembering this... being algebraically minded it helps loads and I jot it down as soon as I see the question coming...<BR><BR>AA - AO = +OC -UD<BR><BR>that is... <BR><BR>Actual overheads Absorbed - Actual Overheads = <BR><BR>+ positive figure, Over absorbed, Credit profit and loss<BR><BR>- negative figure, Under absorbed, Debit profit and loss<BR><BR>...hmm... sounds more complicated when you try to type it but works every time for me!!!!

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