Under absorption and over absorption of overheads. Reason for that.

Question

Accepted Answer

Absorption and over absorption of overheads occur when actual overhead costs differ from the overhead costs absorbed into production.

Absorption of overheads occurs when actual overhead costs are absorbed into production based on a predetermined overhead rate.
Over absorption of overheads happens when the absorbed overhead costs exceed the actual overhead costs incurred.
Under absorption of overheads occurs when the absorbed overhead costs are less than the actual overhead costs incurred.
Reasons for absorption and over absorption include inaccurate cost estimates, changes in production levels, and fluctuations in overhead costs.
Example: If a company's predetermined overhead rate is based on outdated cost estimates, it may result in over absorption of overheads.
Example: A sudden increase in production levels can lead to under absorption of overheads if the predetermined overhead rate does not account for the higher activity levels.

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