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when calculating over/under absorption of overhead, if in the question normal output and budgeted output is given, which will be used to calculate the actual overhead and which will be used to calculate absorbed overhead. i have been thinking both budgeted and normal output means the same…
eg: the absorption rate is $20. normal output is 8000. budgeted output is 8500. what will be the over/under absorbed overhead.? and which output would be used to calculate production cost in profit and loss account?
The absorption rate is calculated using the normal (or average) monthly production. However, some months production might be expected to be higher than average and other months lower than average. We don’t keep changing the absorption rate (and therefore the standard cost) every month – we use the same rate each month which means that in months we expect to produce more we will have over absorbed and in months we expect to produce less we will have under absorbed.
Over the year as a whole budget will equal normal, but not necessarily month by month.
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