What is under and over absorption of overheads.
Answers
The under absorption andover absorption of overhead. ... If overheadis under absorbed, this means that more actualoverhead costs were incurred than expected, with the difference being charged to expense as incurred
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Meaning of Under-absorption of overheads
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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
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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).
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❤️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❤️
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