Page 161 - F2 - MA Integrated Workbook STUDENT 2018-19

Accounting for overheads

6.2 Under absorbed overheads

Example 10

If $21,000 of overheads were absorbed into work in progress:

Production overhead account

$ $
Actual overhead incurred 24,000 Work in progress 21,000
Under absorption 3,000

–––––– ––––––
24,000 24,000

–––––– ––––––

Production overhead under absorption account
$ $

Production overhead 3,000

To take this under absorption to the statement of profit or loss, the entry
would be:

Debit Statement of profit or loss account
Credit Production overhead under absorption account

A debit to the statement of profit or loss increases the cost which makes
sense as we have absorbed too little overhead.

Note: If there is no production overhead under absorption account, the under
absorption can be taken straight to the statement of profit or loss. The entry to
record the under absorption would be:

Debit Statement of profit or loss
Credit Production overhead account

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