{"id":3354,"date":"2020-02-16T07:55:25","date_gmt":"2020-02-16T07:55:25","guid":{"rendered":"https:\/\/commerceiets.com\/?p=3354"},"modified":"2020-02-16T07:55:25","modified_gmt":"2020-02-16T07:55:25","slug":"over-absorption-and-under-absorption-of-overheads","status":"publish","type":"post","link":"https:\/\/commerceiets.com\/over-absorption-and-under-absorption-of-overheads\/","title":{"rendered":"OVER ABSORPTION AND UNDER ABSORPTION OF OVERHEADS"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_72 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/commerceiets.com\/over-absorption-and-under-absorption-of-overheads\/#OVER_ABSORPTION_AND_UNDER_ABSORPTION_OF_OVERHEADS\" title=\"OVER ABSORPTION AND UNDER ABSORPTION OF OVERHEADS\">OVER ABSORPTION AND UNDER ABSORPTION OF OVERHEADS<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/commerceiets.com\/over-absorption-and-under-absorption-of-overheads\/#CAUSES_OF_OVER_ABSORPTION_AND_UNDER_ABSORPTION_OF_OVERHEADS\" title=\"CAUSES OF OVER ABSORPTION AND UNDER ABSORPTION OF OVERHEADS\">CAUSES OF OVER ABSORPTION AND UNDER ABSORPTION OF OVERHEADS<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/commerceiets.com\/over-absorption-and-under-absorption-of-overheads\/#ACCOUNTING_TREATMENT_OF_UNDER_AND_OVER-ABSORPTION\" title=\"ACCOUNTING TREATMENT OF UNDER AND OVER-ABSORPTION\">ACCOUNTING TREATMENT OF UNDER AND OVER-ABSORPTION<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h1 class=\"has-text-align-center wp-block-heading\" id=\"over-absorption-and-under-absorption-of-overheads\"><span class=\"ez-toc-section\" id=\"OVER_ABSORPTION_AND_UNDER_ABSORPTION_OF_OVERHEADS\"><\/span><strong>OVER ABSORPTION AND UNDER ABSORPTION OF OVERHEADS<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h1>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"300\" height=\"168\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2022\/01\/images-10.jpg\" alt=\"OVER ABSORPTION AND UNDER ABSORPTION OF OVERHEADS\" class=\"wp-image-5067\"\/><figcaption><strong><strong>OVER ABSORPTION AND UNDER ABSORPTION OF OVERHEADS<\/strong><\/strong><\/figcaption><\/figure>\n\n\n\n<p><a href=\"https:\/\/commerceiets.com\/overhead\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"Overhead (opens in a new tab)\">Overhead<\/a> expenses are usually applied to production on the basis of predetermined rates. The predetermined rates may represent estimated, actual or normal costs. If the actual expenses fall short of the amount applied, there is said to be an over-absorption of overheads, and, conversely, if the actual expenses exceed the amount applied to production, it is a case of under-absorption. Such over or under-absorption may also be termed as overhead variance, the amount of over-absorption being represented by the credit balance on the variance account, and, conversely, the amount of under- absorption by a debit balance.<\/p>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\" id=\"causes-of-over-absorption-and-under-absorption-of-overheads\"><span class=\"ez-toc-section\" id=\"CAUSES_OF_OVER_ABSORPTION_AND_UNDER_ABSORPTION_OF_OVERHEADS\"><\/span><strong>CAUSES OF OVER ABSORPTION AND UNDER ABSORPTION OF OVERHEADS<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<ul class=\"wp-block-list\"><li>Error in estimating overhead expenses.<\/li><li>Error in estimating the level of production, i.e.\nthe base.<\/li><li>Major unanticipated changes in the methods of\nproduction.<\/li><li>Unforeseen changes in the production capacity.<\/li><li>Seasonal fluctuations in the overhead expenses\nfrom period to period.<\/li><li>Overhead rate may be applied to the Normal\nCapacity which may be less than the full operating <\/li><li>capacity of the undertaking.<\/li><\/ul>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\" id=\"accounting-treatment-of-under-and-over-absorption\"><span class=\"ez-toc-section\" id=\"ACCOUNTING_TREATMENT_OF_UNDER_AND_OVER-ABSORPTION\"><\/span><strong>ACCOUNTING TREATMENT OF UNDER AND OVER-ABSORPTION<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Three methods of accounting treatment of under absorption\nand over absorption are as follows:<\/p>\n\n\n\n<p><strong>1. Use of\nSupplementary Rates:<\/strong> the supplementary rate is adopted when the amount of\nunder or over absorbed overheads is quite large, a supplementary rate may be\nfound out. The cost of each job, order or process may be adjusted by applying\nthis supplementary rate. The rate may be calculated as follows:<\/p>\n\n\n\n<p><strong>Supplementary Rate =\nAmount of over or under \u2212 Absorbed overheads\/Actual Base<\/strong><\/p>\n\n\n\n<p>In case of under absorbed overheads the rate is considered\nas positive, while in case of overabsorption of overheads, it is termed as negative.\nIn case of under-absorption the cost of the job or product is increased by\nadding it to overheads charged on the basis of a positive supplementary rate\nand in case of over-absorption the cost of the job or product is decreased by deducting\nthe extra amount of overheads charged by applying a negative supplementary\nrate.<\/p>\n\n\n\n<p><strong>2. Carrying Over of\nOverheads:<\/strong> The amount of over or under absorption is carry forward to the\nnext year. This method may be adopted in situation where the normal business cycle\nextends for more than one year. This method is not very prevalent in the\nindustry.<\/p>\n\n\n\n<p><strong>3. Writing off to\nCosting Profit and Loss Account:<\/strong> In case the amount of under or\noverabsorbed overhead is very small it is not worthwhile to use supplementary\nmay be written off to Costing Profit and Loss Account. If due to some abnormal\nfactors, the amount of under or over absorbed is large it should be transferred\nto Profit and Loss Account.<\/p>\n\n\n\n<p class=\"has-text-align-center\"><strong>REPORTING OF OVERHEAD COSTS<\/strong><\/p>\n\n\n\n<p><strong>Presentation:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Overheads shall be presented as separate cost\nheads like production, administration and marketing.<\/li><li>Element wise and behavior wise details of the\noverheads shall be presented, if material.<\/li><li>Any under-absorption or over-absorption of\noverheads shall be presented in the reconciliation statement.<\/li><\/ul>\n\n\n\n<p><strong>Disclosure:<\/strong><\/p>\n\n\n\n<p>The basis of assignment of overheads to the cost objects.<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Overheads incurred in foreign exchange.<\/li><li>Overheads relating to resources received from or supplied to related parties<\/li><li>Any Subsidy \/ Grant \/ Incentive or any amount of similar nature received \/ receivable reduced from overheads.<\/li><li>Credits \/ recoveries relating to the overheads.<\/li><li>Any abnormal cost not forming part of the overheads.<\/li><li>Any unabsorbed overheads.<\/li><\/ul>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/cost-accounting\/\">Cost Accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/scope-of-cost-accounting-pdf\/\">Scope of cost accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/elements-of-cost\/\">Elements of cost<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/types-of-cost\/\">Types of cost<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/material-control-in-cost-accounting-pdf\/\">Material control<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/perpetual-inventory-system\/\">Perpetual inventory system<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/pricing-of-materials\/\">Pricing of materials<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/bin-card\/\">Bin Card<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/store-ledger\/\">Stores Ledger<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/incentive-plans\/\">Incentive plans<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/overhead\/\">Overheads<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/accounting-treatment-of-idle-time\/\">Idle time<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/system-of-wage-payment-in-cost-accounting\/\">System of wage payment in cost accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-time-rate-system-and-piece-rate-system\/\">Time rate vs piece rate wage system<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/cost-centre\/\">Cost Center<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/labor-turnover\/\">Labour Turnover<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/difference-between-management-accounting-and-cost-accounting\/\">Difference between management accounting and cost accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/allocation-and-apportionment-of-overheads\/\">Allocation and apportionment of overheads<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-allocation-and-apportionment-of-overheads\/\">Allocation vs Apportionment of overheads<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/absorption-of-overheads\/\">Absorption of overheads<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/over-absorption-and-under-absorption-of-overheads\/\">Over absorption and under absorption of overheads<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/activity-based-costing\/\">Activity based costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-traditional-costing-and-activity-based-costing\/\">Traditional costing vs ABC system<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/reconciliation-of-accounts\/\">Reconciliation of accounts<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/unit-costing\/\">Unit costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/cost-sheet-format\/\">Cost sheet format<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/cost-sheet-vs-production-account\/\">Cost sheet vs production sheet<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/job-costing\/\">Job costing<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/batch-costing\/\">Batch Costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-job-costing-and-batch-costing\/\">job costing vs batch costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/contract-costing\/\">Contract costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-job-costing-and-contract-costing\/\">Job Costing vs Contract costing<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/process-costing\/\">Process Costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/process-costing-vs-job-costing\/\">Process costing vs job costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/joint-products\/\">Joint products<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/by-products\/\">By Product&nbsp;<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/equivalent-production\/\">Equivalent production<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/marginal-costing\/\">Marginal costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/applications-of-marginal-costing\/\">Application of marginal costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/cost-volume-profit-analysis\/\">Cost volume profit analysis<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/tools-and-techniques-of-marginal-costing\/\">Tools and techniques of marginal costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/budget\/\">Budget<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/break-even-point\/\">Break even point<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/process-of-budgetary-control\/\">Process of budgetary control<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/explain-the-advantages-and-limitations-of-budgetary-control\/\">Advantages and limitations of budgetary control<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/budgetary-control\/\">Budgetary Control<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/zero-base-budgeting\/\">Zero base budgeting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/standard-costing\/\">Standard Costing<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/variance-analysis\/\">Variance Analysis<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-standard-costing-and-budgetary-control\/\">Standard costing vs budgetary control<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-management-accounting-and-cost-accounting\/\">Management accounting vs cost accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-financial-accounting-management-accounting-and-cost-accounting\/\">Cost accounting vs financial accounting<\/a><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link\" href=\"https:\/\/www.linkedin.com\/in\/kajal-mahajan-7549b2197\/\" target=\"_blank\" rel=\"noreferrer noopener\">CONNECT ON LINKEDIN<\/a><\/div>\n<\/div>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"300\" height=\"168\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2022\/01\/images-10.jpg\" alt=\"OVER ABSORPTION AND UNDER ABSORPTION OF OVERHEADS\" class=\"wp-image-5067\"\/><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>OVER ABSORPTION AND UNDER ABSORPTION OF OVERHEADS Overhead expenses are usually applied to production on the basis of predetermined rates. The predetermined rates may represent estimated, actual or normal costs. If the actual expenses fall short of the amount applied, there is said to be an over-absorption of overheads, and, conversely, if the actual expenses&#8230;<\/p>\n<p class=\"more-link-wrap\"><a href=\"https:\/\/commerceiets.com\/over-absorption-and-under-absorption-of-overheads\/\" class=\"more-link\">Read More<span class=\"screen-reader-text\"> &ldquo;OVER ABSORPTION AND UNDER ABSORPTION OF OVERHEADS&rdquo;<\/span> &raquo;<\/a><\/p>\n","protected":false},"author":2,"featured_media":3355,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[187],"tags":[],"class_list":["post-3354","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-cost-accounting"],"_links":{"self":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts\/3354","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/comments?post=3354"}],"version-history":[{"count":0,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts\/3354\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/media\/3355"}],"wp:attachment":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/media?parent=3354"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/categories?post=3354"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/tags?post=3354"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}