Meaning the amount of overhead absorption in cost is the total amount of the overhead costs allocated to individual costs units by application of overhead rate. Overhead cost are fully recovered
from production if actual rate method of absorption is adopted as the amount charged to production is equal to the amount of overhead incurred. But when a predetermined rate is used on the basis of budgeted overhead and the rate is applied to the actual base, the actual overhead expenses may be different from the charged or budgeted overhead expenses. If the amount absorbed is less than the amount incurred which may be due to actual expenses exceeding the estimates and the total output or hours worked being less than estimates, the difference is known as under absorption. Under absorption of overhead thus means the amount by which the absorbed overheads falls short of the actual amount of overhead incurred. It represent understanding the costs as the overhead expenses incurred are not fully recovered in the cost of jobs, process etc. on the other hand, if the amount absorbed is more than the expenditure incurred due to expenses being less than the estimates and the output or hours worked exceeding the estimates., it would mean over absorption of overheads and will be the costs. Over absorption of overhead thus means the excess of overheads absorbed over the actual amount of overhead incurred.
Causes of under or over absorption of overheads
Error in estimating overheads- the total overheads actually incurred for a department may be more or less than the amount estimated because of error in estimating this may due to deliberate decision in this regard of lack of proper control.
There may be some important changes in the work situation such as heavy overtime, introduction of another shift etc.
The actual hors worked may be more or less than hours anticipated
Work in progress might not have been charged with its share of overhead in cost accounts.
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