what is meant by under-absorption and over_absorptiin overheads? what are it's causes?
Answers
Answer:
If the overheads absorbed are higher than the actual overheads incurred, it is called over absorption. If the overhead absorbed is lower than the actual overheads incurred during the accounting period, it is called under absorption.
The main causes responsible for under-absorption and over-absorption of overhead are:
Under-utilization of the production capacity.
Seasonal fluctuations in production in case of seasonal factories.
Errors in anticipating the overhead costs or the quantum or value of the base.
Major change in the method of production.
Explanation:
Answer:
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.