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Under-absorption and Overabsorption of Overhead


- Certain expenses may be direct expenses for certain costs centres but they are indirect for the production departments. These do not form part of prime cost, but absorbed as overheads. 

- The amount of overhead absorbed in costs is the sum total of the overhead costs allotted to individual cost units by application of the overhead rate.

- When a predetermined rate worked out on the basis of anticipated or budgeted overhead and base is applied to the actual base, the amount absorbed may not be identical with the amount of overhead expenses incurred if either the actual base or the actual expenses or both deviate from the estimates or the budget.

Under-absorption 

- If the amount absorbed is less than the amount incurred , the difference denotes underabsorption. 

- It is also termed as 'under recovery' 

- It may be due to – Actual expenses exceeding the estimate; and / or – Output or the hours worked may be less than the estimate


- If the amount absorbed is more than the expenditure incurred this would indicate over-absorption, which goes to inflate the costs. 

- Over-absorption is also formed as 'over recovery'.

- It may be due to – Expense being less than estimate; and / or – Output or hours worked may be exceeding the estimate