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
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | MA | Direct | September 2026–June 2027 |
| FIA | FMA | Direct | September 2026–June 2027 |
