### Cambrige AS and A Level Accounting Notes (9706)/ ZIMSEC  Advanced Accounting Level Notes: Over and Under-absorption

• As has been said before overhead absorption rates are calculated in advance
• The formula for getting an overhead absorption rate is:
• $\text{OAR=}\dfrac{\text{Budgeted Production Overhead}}{\text{Budgeted Level of Activity}}$
• The budgeted level of activity can be units,labour hours, machine hours etc
• It is very unlikely however that budget overheads or/and the budgeted level of activity will be equal to the overheads/bases that will be actually realised during the year/period
• If estimates for the budgeted overheads and/or the budgeted level of activity are different from the actual results for the year then this will lead to either:
1. under-absorption (recovery) of overheads or
• Under-absorption is when the total absorbed overheads that were absorbed using predetermined rates are less than the actual overheads during the period
• Under-absorption occurs because the actual level of activity was less than the budgeted level of activity and/or the budgeted overheads were less than actual overheads
• Over-absorption is when the total absorbed overheads that were absorbed using predetermined OARs exceed the actual overheads during the period
• Over-absorption occurs when the actual level of activity is more the budgeted level of activity or/and the budgeted overheads are less than the actual overheads

Calculating Under or Over-Absorption

• This involves three steps:
1. Calculate the OAR based on the budget
2. Calculate the overheads absorbed based on the actual level of activity i.e. $\text{Overheads absorbed = predetermined OAR x actual level of activity}$
• If at the end of this period the overheads are greater than the actual overheads then there has been over-absorption of overheads
• If on the other hand the overheads absorbed are less that the actual overheads it means that there has been under-absorption of overheads
• Over and under-absorption for the period are transferred to the income statement (statement of profit) for that period as either income or an expense respectively

#### Example

The following data relates to Benzi Ltd for period ended 31 December 20×8

 Budgeted Actual Overheads $80 000$90 000 Labour hours worked 20 000 22 000

Required:

1. Calculate the under or over-absorption

#### Solution

• The first step is to calculate the OAR using the formula above
• $\text{OAR=}\dfrac{\text{\80 000}}{\text{20 000}}$
• This gives an OAR of $4 per each hour worked • The second step is to determine how much of these overheads were absorbed (recovered) • $\text{Overhead absorbed=22 000x\4}$ • That means overheads totalling$88 000 were absorbed
• Actual overheads were $90 000 • The difference between absorbed and actual is: • $\text{\88 000-\90 000=-\2 000}$ • This means total absorbed overheads were$2 000 less than actual overheads
• This means there was an under-absorption of \$2 000

To access more topics go the ZIMSEC Advanced Level Accounting page

To access more topics go to the Cambridge AS/A level page

### Quick NetOne, Econet, And Telecel Airtime Recharge

{{error_message}}
{{error_message}}