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Accounting for overheads

6.2 Under absorbed overheads

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

Production overhead control 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 control 3,000 Work in progress 21,000

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 control account

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