Under-absorption
Under-absorption occurs when overhead absorbed into output is less than actual overhead incurred. It can arise from expenditure above the amount built into the rate, lower activity or both. Compare actual expenditure with the absorbed amount, not merely with budgeted expenditure. In a simple absorption profit reconciliation, the shortfall increases the period’s expense, unless a question specifies another appropriate treatment. Investigate the underlying expenditure and activity effects.
Worked example
Actual overhead is $52,000. At a predetermined $5 per hour for 9,000 actual hours, absorbed overhead is $45,000. Under-absorption is $7,000.
Common mistake
Under-absorption does not mean actual expenditure was necessarily above budget: reduced activity can create a shortfall even with spending on budget.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | MA | Direct | September 2026–June 2027 |
| FIA | FMA | Direct | September 2026–June 2027 |
