1. Avatar of Shahir says

    Sir, predetermined OAR=Budgeted overheads/Budgeted activity levels
    Fixed Production OAR=Budgeted fixed production overheads/budgeted production
    What is the difference between these two, Are they same??

  2. avatar says

    Hello Mr Moffat,

    Please will i be right if write and use the following formulas for easy remembrance during the exam?

    1. Overhead Absorption Rate (OAR) = Budgeted Overheads divided by Budgeted Activity level (ie no of hours, no of units, etc)

    2. Absorbed Overheads= OAR X Actual Activity Level

    3. If Absorbed Overhead > Actual Overhead = Over absorption
    if Absorbed Overhead < Actual Overhead = Under Absorption

    4. Under absorption overstates profits so it is deducted from the profits in the income statement

    5. Over absorption understates profits so it is added to the profits in the income statement.

    Knowing this, will I be able to answer any questions under this topic or is there a part i have missed out or is there a way the question can be asked that i wouldnt be able to use any of the above approaches?

    Is this right please? This will help make me more comfortable and confident with this topic.

      • avatar says

        Thank you very much for your confirmation. Makes me more relaxed and confident. I will not take the formula to the exam with me because I do not want to get banned.

        Next Chapter

        Thank you once again!

  3. avatar says

    Sir, you are a prince among men. I had a lot of trouble understanding absorption costing, but now the concept is crystal clear to me. Do correct me, but based on my comprehension,

    Absorbed overheads: Estimated overheads on actual output (etc.)
    Budgeted overheads: Estimated overheads on estimated output (etc.)
    Actual overheads: Self explanatory

    By etc. I mean any other level of activity eg. labor hours worked, machine hours and so on

    Budgeted OAR (Overhead absorption rate)= Budgeted overheads/ Budgeted output (etc.)
    Absorbed overheads= Budgeted OAR x Actual output (etc.)
    Over/Under absorbed overheads= Absorbed overheads – Actual overheads
    [The reason for doing so is to check whether we have overcharged or undercharged in our estimates with respect to the actual overheads].

    If Absorbed overheads>Actual overheads: Over-absorption occurs (Profits increase)
    If Absorbed overheads< Actual overheads: Under-absorption occurs (Profits decrease)

  4. avatar says

    @John Moffat

    sir, when doing process costing, if there is no value given for normal loss, is there a method for calculating this value and if yes, how do we calculate it??

    i just know that the value should already be given in the question ^^

  5. Avatar of Temperance says

    @John Moffat

    H Sir, I’m just trying to understand the concept of under and over absorption.

    Is it that an under absorption occurs when the amount absorbed is less than the actual overhead incurred?

    And an over absorption occurs when the amount absorbed is greater than the actual overheads occurred?

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