Please correct me , when calculate under or over absorption of OHs if under absorbed OH need to minus in the questions and when it over absorbed OH is added ? am I correct?
this is based on the difference between actual production and budgeted production.
please advise. thank you
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Absorption costing - add/minus in over or under absorbed
correction in my query :
if under absorbed o/h this will be added to production costs in the income statement , if over should minus . please advise.
11y ago#2If you have over absorbed (i.e. over charged) then you need to add the over absorption to the profit. If you have under absorbed (i.e. under charged) then you need to subtract the under absorption from the profit.
Why in this questions when under production 4,600 is plus ?
See below question :
Fixed manufacturing ohs, which are absorbed into the cost of prod at annual rate ( based on normal activity 20,000 units per period), are 92,000 per period.
My working : $92,000 / 20,000 = 4.60 oar
Any over or under absorbed fixed manufacturing ohs balances are transferred to the profit and loss account at the end of each period, in order to establish the manufacturing profit.
Sales 22,000 & prod. 21,000
Calculate under / over absorption of ohs ( my working)
Actual prod 21,000 - budgeted prod 20,000 = 1000 under prod x 4.60 = 4600 is under absorbed
11y ago#4If we are using absorption costing, then every unit actually produced will have been charged at $4.60 per unit. Since they actually produced 21000 units, they will have absorbed (charged) 21000 x $4.60 = 96,600.
However, since the total should be 92,000, then they have over charged / over-absorbed the difference of 4,600 (over-absorbed, not under-absorbed).
If they have charged too much fixed overheads, and therefore the actual cost should be lower, it means that the correct profit will be higher by 4600
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