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* When actual production outweighs the average production (which was used for absorption) it results in overabsorption
*Overabsorption=(Actual production units- Average prod units) × Fixed o/h per unit
Sir,
How are these statements true?I am confused with concept of avg production and Actual production moreover can you pls explain the formula
The amount absorbed into the profit statement is the actual production multiplied by the standard absorption rate.
The standard absorption rate is the budgeted fixed overheads divided by the budgeted production (which is what they are expecting the average production per period to be).
From period to period, in some periods the actual production may be higher than the average and in other periods the actual production may be lower than average.
If the actual production is higher, then they will have absorbed too much overheads. If actual production is lower, then they will have absorbed too little overheads.
All of this is explained, with examples, in my free lectures.
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