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Traditional costing

3.3 The over-/under-absorption

This is calculated as:

(Budgeted overhead rate per unit × actual units) – actual overheads incurred
If this value is positive then overheads have been OVER absorbed, and if it is
negative then overheads have been UNDER absorbed.

Example 2

Calculate the over-/under-absorption for Limco.

Solution

Overheads absorbed = $10 per unit × 21,000 units = $210,000

Actual overheads were $200,000

Over-absorbed = $210,000 – $200,000 = $10,000

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