Over and Under Absorption of Overheads

Overhead expenses are those expenses which cannot be easily traced or allocated to the product which is being manufactured and therefore they are added to the total cost of production when it comes to allocation of such expense. Companies usually decide the amount in advance for overhead expenses and that leads to over or under absorption of overhead.

Over absorption of overhead happens when the actual expense incurred by a company is less than estimated overhead while under absorption of overhead happens when the actual expense incurred by a company is more than estimated by the company in the budget. There are many causes behind over/under absorption of overhead like output being more or less than planned or price fluctuation in the raw material and so on.

Close look at the variance can be quite be useful for a company because it will help the company in future in controlling the factors which have lead to such disparity and therefore leading to better cost control and cost reduction by the company.

0 comments… add one

Leave a Comment

Related pages

accounting cost conceptwhat is cost pull inflationadvantages and disadvantages of duopolydisadvantages of social networking for businesseswhat are the benefits of swot analysisexamples of mixed economy countriesfmcg acronymwhat are normal goods and inferior goodswhat is command economy advantages & disadvantagesdistinguish between revenue expenditure and capital expendituredefine subventionvertical analysis accountingmonopolistic competitive market structurestrengths of command economycurrents assetsdisadvantages globalizationfmcg long formdirect quotation exchange rateprocess costing disadvantagesrent paid in advance journal entrybluevsreddefine crossed chequedifference between debentures and shareshow to fill out a bank withdrawal slipgdr financecomplements and substitutes economicsimportance of hire purchasedirect indirect quotationdisadvantages of cashless societycost push inflation occurs whenbluevsredcharacteristic of mixed economymeaning of fiiconglomerate organizationmerits and demerits of organizational structureimplicit cost vs explicit costadvantages and disadvantages of owners capitaldeferred income journal entryexamples of perfect competition market structurewhat is horizontal mergercapitalism disadvantagesdifference between normal good and inferior goodprocess costing advantages and disadvantagesadvantages and disadvantages of a bank loandisadvantages of urbanizationbenefits of a mixed economyfactoring receivables definitionassumption of capm modeladvantages of audit programmeformula of operating leverageaccounting entries for purchasesdisadvantages of financial accountingslr in banking termsdisadvantages of hedge fundsdisadvantages of organizational chartautonomous demand and derived demanddisadvantages of venture capitalwhat is derivative marketexamples of vertical mergermarginal costing definition accountingmarket penetration advantages and disadvantagesexamples of price elastic goodscrossed chequesfull meaning of fdidisadvantages of living in mexicodrawings accounting definitionfull disclosure principle gaapadvantages and disadvantages mixed economysocialist economy vs capitalist economynondurable goods listfunctional organizational structure advantages and disadvantagesnormal good definition economicspurpose of preparing trial balanceskimming pricing strategy exampleaccounting concept meaningadvantages and disadvantages of microeconomicswhat is law of diminishing returns in economicsfifo method accountingadvantages of planned economic systemdisadvantages of debit cards