UNDER ABSORPTION AND OVER ABSORPTION OF OVERHEADS Overhead absorption rate obtained by using formulas is applied to actual data.By this way overheads are absorbed by units produced. Later on overheads absorbed are compared with overheads actually incurred to find the difference if any. If overheads absorbed are lower than overheads incurred, then difference is called as under absorbed overheads. If overheads absorbed are more than overheads incurred, then difference is called as over absorbed overheads. Thanks
Hii Absorption The process of recovering overheads to cost of products is called ‘absorption’. In other words all the overheads allocated & apportioned to a department are finally absorbed by the units produced. When actual overhead rate is applied on actual cost units, the actual and absorbed overheads would be equal. However if a pre-determined rate is applied on the actual base, it would result in a difference between actual and absorbed overheads. This would happen either because the actual base deviated from the budgeted base or the actual expenses deviated from the budget. Over absorption- If the absorbed overhead is more than the actual, it is called ‘over absorption'. Under absorption if the actual overhead is more than the absorbed overhead then it is called ‘under absorption’. Thanks
Hello friend The amount of overhead absorption in costs is the total amount of the overhead costs allotted to individual cost units by application of overhead rate. Overhead costs 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 overheads incurred. But when a predetermined rate is used on the basis of budgeted overheads 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/or the output or hours worked being less than the estimates, the difference is known as under-absorption. Under-absorption of overheads thus means the amount by which the absorbed overheads fall short of the actual amount of overheads incurred. It represents understating the costs as the overhead expenses incurred are not fully recovered in the cost of jobs, processes etc. On the other hand, if the amount absorbed is more than the expenditure incurred due to expenses being less than the estimates and/or the output or hours worked exceeding the estimates, it would mean over-absorption of overheads and will inflate the costs. Over-absorption of overheads thus means the excess of overheads absorbed over the actual amount of overheads incurred
Hii Meaning of Under-absorption of overheads Under-absorption of overheads means that the amount of overheads absorbed in the production is less than the amount of actual overheads-Incurred. For example if the overheads absorbed on a predetermined basis are Rs: 1, 00,000 and the actual overheads incurred are Rs. 1, 20,000, there is under-absorption to the extent of Rs.20, 000.It represents under stating the costs as the overheads incurred are not fully recovered in the cost of jobs or processes, etc. Under-absorption is also termed as 'under recovery', Meaning of over-absorption of overheads Over-absorption of overheads means the excess of overheads absorbed over the actual amount of overheads incurred. In other words when the amount absorbed is more than the expenditure incurred due to expenses being less than the estimates it would mean over-absorption of overheads. Usually over-absorption inflates the cost. Over- absorption is also formed as 'over recovery'. For example the overheads recovered are Rs.3, 00,000 and the actual production overheads are Rs.2, 75,000 then there will be over-absorption of Rs.25, 000. (Rs.3, 00,000 - Rs.2, 75,000).
Hiiii friend.... **Under Absorption of overheads**: If the amount of overhead assigned to the products is less than the amount of overhead actually incurred, the products have underabsorbed the overhead costs. -- **Over absorption of Overheads** If the amount of overhead assigned to the products manufactured is greater than the amount of overhead actually incurred, the products have overabsorbed the overhead costs. -- Regards, Jitendra Suthar