Page 81 - BA2 Integrated Workbook STUDENT 2018

Overhead analysis

6.2 Under or over absorption

The problem with using predetermined overhead absorption rates is that the actual
figures for overhead and for the absorption base are likely to be different from the
estimates used in calculating the absorption rate.

At the end of the period, the company must determine if it has absorbed too much or
too little overhead into the products. Two things could have changed during the
period:

 The amount of the overhead could be more or less than was budgeted.

 The quantity of the absorption base (units/labour hours/machine hours) could
have been more or less than budgeted.

It is these differences which cause an under- or over-absorption of production
overheads.

Consider the following data:

Budgeted labour hours 12,000
Budgeted overheads $175,000
Actual labour hours 11,500
Actual overheads $182,000
Calculate the over or under absorption of overheads.

Labour hour overhead absorption rate = $175,000 ÷ 12,000 = $14.58 per hour.
$
Overhead incurred 182,000
Overhead absorbed ($14.58 × 11,500 hours) 167,670
———––
Over/under-absorption 14,330
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Illustrations and further practice

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