Under and Over Absorption of Overheads In the context of cost accounting, underabsorption occurs when the actual cost of a product or service exceeds its...
In the context of cost accounting, underabsorption occurs when the actual cost of a product or service exceeds its standard or expected cost. This means that the cost of production is higher than what it should be.
An example of underabsorption could be when a company buys raw materials for 12 per unit in production.
Overabsorption happens when the actual cost of a product or service is lower than its standard or expected cost. This means that the company is wasting resources or producing something at a lower price than it should.
An example of overabsorption could be when a company uses 10 per unit to complete a task.
Understanding under and overabsorption of overheads is important because it can impact the accuracy of a company's financial statements. When a company underappributes costs, it may overstate its expenses and misrepresent its profitability. Conversely, when a company overappributes costs, it may understate its expenses and misrepresent its profitability