ECONOMICS

Detailed explanation-1: -If the overheads absorbed are higher than the actual overheads incurred, it is called over absorption. If the overhead absorbed is lower than the actual overheads incurred during the accounting period, it is called under absorption.

Detailed explanation-2: -If overhead is over absorbed, this means that fewer actual overhead costs were incurred than expected, so that more cost is applied to cost objects than were actually incurred. This means that the recognition of expense is reduced in the current period, which increases profits.

Detailed explanation-3: -If the amount absorbed is less than the amount incurred which may be due to actual expenses exceeding the estimates and/or the output or hours worked being less than the estimates, the difference is known as under-absorption.

Detailed explanation-4: -Overhead is overabsorbed when the amount allocated to a product or other cost object is higher than the actual amount of overhead incurred, while the amount is underabsorbed when the amount allocated is lower than the actual amount of overhead incurred.

Detailed explanation-5: -(2) A supplementary rate can be used to adjust the amount of under-or over-absorption. The supplementary rate is determined by dividing the amount of under – or over-absorption by the actual absorption base.