Question

Explain the term underabsorption and overabsorption of overheads. Explain any three methods of absorbing production overheads into the cost of production.

Answer 1

If overhead is under absorbed, this means that more actual overhead costs were incurred than expected, with the difference being charged to expense as incurred. This usually means that the recognition of expense is accelerated into the current period, so that the amount of profit recognized declines.