Over and Under Absorption of Overheads

Overhead expenses are those expenses which cannot be easily traced or allocated to the product which is being manufactured and therefore they are added to the total cost of production when it comes to allocation of such expense. Companies usually decide the amount in advance for overhead expenses and that leads to over or under absorption of overhead.

Over absorption of overhead happens when the actual expense incurred by a company is less than estimated overhead while under absorption of overhead happens when the actual expense incurred by a company is more than estimated by the company in the budget. There are many causes behind over/under absorption of overhead like output being more or less than planned or price fluctuation in the raw material and so on.

Close look at the variance can be quite be useful for a company because it will help the company in future in controlling the factors which have lead to such disparity and therefore leading to better cost control and cost reduction by the company.

 

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