What is meant by the terms under-absorption and over-absorption of fixed overheads how they arise and how they are calculated?

Answer 1

Over or Under Absorption

• Note that as long as planned level of activity and the actual level of activity is not the same there is always an Over or Under Absorption situation

• This is because overhead absorption rate is set at the start of the period based upon an expected level of production and that during the period, the level of output and or overheads will be different from the planned overheads and or output.

• OVER-absorption occurs when the total overhead recovered or absorbed is GREATER than the actual level of overheads for the period.

• UNDER-absorption occurs when the total overheads recovered or absorbed is LESS than the actual overheads incurred in the period.