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Over-absorption

Over-absorption occurs when overhead charged to output exceeds actual overhead incurred. A predetermined rate can generate it when spending is below the amount assumed or activity is higher than expected. In a simple absorption profit reconciliation, remove the excess charge to reduce expense and increase profit. Distinguish it from a favourable expenditure variance because activity can also explain the difference.

Worked example

A $6 rate applied to 10,000 actual hours absorbs $60,000. Actual overhead is $57,000, so overhead is over-absorbed by $3,000.

Common mistake

Do not reverse the definition: actual overhead exceeding absorbed overhead is under-absorption, not over-absorption.

Where it appears in your exams

QualificationExamRelationshipPeriod
ACCA MA Direct September 2026–June 2027
FIA FMA Direct September 2026–June 2027