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Dear John,
Hope you are fine and thank you for your lectures for both F2 and F3.I have a question regarding calculating overhead according to IAS 2. As I learned in paper F2, in order to calculate under/over absorption, we should take into consideration TWO reasons:
1 – the difference between budgeted and actual overhead
and
2 – budget overhead & actual and budgeted unit.Now my question is that in paper F3, according to IAS 2, we should recognized unabsorbed overhead as expense. How should we calculate unabsorbed overhead? which one is correct?
1 – Budgeted overhead / budgeted unit
In this case we can say that unabsorbed overhead comes from both difference between budgeted and actual overhead and budgeted and actual units. (Just like F2)
OR
2 – Actual overhead / budgeted unit
In this then we can say that unabsorbed overhead comes JUST from the difference between actual and budgeted units as we are using the actual overhead in the formula.
Which one is correct?
Many thanks for your answer.This is not really relevant for Paper FA (it is no longer called F3 🙂 ) because in the situation where a business is producing its own goods then for Paper FA we simply charge the actual fixed overheads incurred in the calculation of the cost of goods sold. We do not absorb as we do in Paper F2 and therefore do not need an adjustments for over or under absorbed overheads.
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