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Accounting for 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.

Step one – calculate the OAR

Labour hour overhead absorption rate = $175,000 ÷ 12,000 = $14.58 per hour.

Step two – calculate the overhead absorbed

Overhead abosorbed = $14.58 × 11,500 = $167,670

Step three – compare the actual cost with the absorbed overhead

$
Overhead incurred 182,000
Overhead absorbed 167,670

———–
Over/under-absorption 14,330

———–

Absorbed > Actual = Over absorbed

Absorbed < Actual = Under absorbed

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