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Hi, I was hoping if anyone could help me clearing the concept of under and over absorption. a lot of the time when doing practice questions I end up getting the right figure but get a bit confused to why its over or under absorbed. the same applies to Favourable and Adverse. I know its a simple thing but it could cost me marks so I would like to get it right. I am much obliged to anyone who can help me with this.
From my understanding. overheads are absorbed before you know the actual figure. Say for instance, you have already absorbed overheads with a value $32,000, but the actual overheads ended up being $32,100
Actual o/hs: $32,100
Absorbed o/hs: $32,000The difference would be $100, meaning you were $100 short of the actual overheads. Therefore, you have under-absorbed your overheads by $100.
Say you have absorbed overheads at $32,300, and the actual overheads were again $32,100. You have overabsorbed overheads of $200.
If there is an error in my explanation, anyone can feel free to correct me.
For the adverse and favourable variances, I recommend you watch the Opentuition Variance analysis videos on youtube and really try to understand the reasoning behind it.
A easy way to understand under/over absorbed over heads is to figure out the question, and note down the actual over heads first (usually given), then work out the overhead absorption rate ( budgeted overhead / budgeted absorption basis e.g labor or units ) if they have not given it. multiply this with the ACTUAL production and the answer is absorbed overheads.
e.g is you are told actual overheads is 132000 and you have worked out 130000 for absorbed overheads.
ACTUAL overheads = 132, 000
ABSORBED overhead = 130, 000
therefore under absorbed by 2000 as 130 is lower than 132
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