ACC-P1--under/overabsorped o'heads confusion!!HELP PLZ

[darenchamp08]

im so confused about over/under-absorption...each time i see it in a MCQ...i simply dont know what to do!!
help plz im having acc P1 in 2 days!

 

[Ambreen]

wait i'm typing the notes

 

[Ambreen]

The topic is called Absorption Costing:

- It classifies costs into production costs and selling costs.
- It calculates gross profit.
- Inventories are valued at Full Cost
- It includes not only Marginal Cost Of Production but on element of Fixed Production Overheads as well, which is represented by OAR (Overhead Absorption Rate)

OAR = Budgeted Fixed Production Overheads divide by Normal Units produced.

In the absence of normal production, actual production is used.

Over-absorption (+ with gross profit)
Under-absorption (- from gross profit)

Full Cost = Marginal Cost Of Production + OAR

Hope this notes helped you out!

 

[Ambreen]

Overabsorbed is usually used in the context of a manufacturer’s production overhead costs. Since manufacturing overhead costs are not directly traceable to products, they need to be allocated, assigned, or applied to the products through an overhead rate. We also state that the products absorb the overhead costs through the overhead rate.
The overhead rate is normally a predetermined rate—meaning that it was calculated prior to the start of the accounting year by using 1) the expected amount of overhead costs, and 2) the expected volume of production. Because of these two estimates, it is unlikely that the amount of overhead allocated, applied, assigned, or absorbed will be equal to the actual overhead costs incurred.

 

[darenchamp08]

ohh thats great thanks a lot!!
this will help me a lot