How to Treat the Under-absorbed Overhead in the Cost Accounts

Under-absorbed overhead means, budgeted overhead are less than actual overheads. We calculate actual overhead with recording of each overhead and we calculate budgeted overhead on the basis of machine hours expected and machine hour rate.

If overheads are under-absorbed, at that time, it is necessary to find the causes of this under absorption and then according to the reason, we treat under-absorbed overheads in cost accounts.

With following example, we try to make you understand about “how to treat the under-absorbed overhead in the cost accounts?”


In a factory, overheads of a particular department are recovered on the basis of Rs. 5 per machine hour. The total expenses incurred and the actual machine hours for the department for the month of august were Rs. 80,000 and 10,000 hours respectively. Of the amount of Rs. 80,000, Rs. 15000 became payable due to an award of the labor court and Rs. 5000 was in respect of expenses of the previous year booked in the current month (August). Actual production was Rs. 40,000 units, of which 30,000 units were sold. On analyzing the reasons, it was found that 60% of the under absorbed overhead was due to defective planning and the rest was attributed to normal cost increase. How would you treat the under-absorbed overhead in the cost accounts?


Total Actual expenses = Rs. 80,000

Less award of labor court – Rs. 15000

Less previous year expenses – Rs. 5000


Balance actual expense = Rs. 60000

Less budget overhead

5 X 10000 = - Rs. 50,000


Under- absorbed overhead = Rs. 10,000

Treatment of under – absorbed overheads

60% of 10000 = Rs. 6000 will be debited to profit and loss account

40% X 10000= 4000 will distributed to finished goods and cost of sale

Total balance under-absorbed Rs. 4000

Unit produced Rs. 40000

Rate of under-absorbed per unit = 40000/4000 = Rs. 0.10 paise per unit

Under absorbed overhead charged on finished goods = Rs. 10000 (Closing stock) X 0.10 per unit = 1000 Rs.

Under absorbed overhead charged on cost of goods sold = Rs. 30000 X 0.10 p = Rs. 3000







access account accountant Accounting accounting definitions accounting ebook Accounting education accounting procedure accounting process outsourcing Accounting Software advance advertising africa Amalgamation amendments announcements Annuity assets audit auditing Australia B.Com. balance sheet bank Bank reconciliation banking basic accounting BBA benefits best bill black money blog bloggers book keeping bookkeeping Branch Accounting - full tutorial budget Budget variance business businessman CA calculator canada capital capital budgeting career cash cash book cash flow statement Chiense children china class coaching coins college commerce commerce students company computer computer accounting conference Contact vinod kumar Control Your Spending corporate accounting cost cost accounting cost center cost centre CPA credit credit card cs currency data Debit and credit debit cards debt debtor degree depletion depreciation Diwali Messages documents dollar domain Downloads Dubai e-accounting earning education Education Loans email employee EPF ERP euromoney examination excel excise duty expenses facebook factor of loan fans feature fifo FII fiji finacle finance Financial financial accounting fire insurance flickr flow forensic forex formula france fraud free fun function fund GAAP GDP gdr germany gold goodwill goodwill accounting google google apps Google Adsense google apps google base google buzz google calendar Google docs google finance google fusion tables google talk govt. GST guide health Hindi Hindi Language history holding company How to treat FBT in Tally 9 HRA ICAI ICAWI ICICI Bank IFRS income income statement Income Tax India indian railway Indonesia inflation inflation accounting infographics information inspiration insurance insurance accounting Intangible interest international Internet Introduction of Tally 9 inventory investment investment in Shares invoice IT Japan Job costing journal entries Journal Entries eBook Help Kalculate keyboard kindle kuwait laptop law LBT learning lease lecture ledger leducation Leverage Analysis liabilities lifo linkedin loan logical point loss loss of profit M.Com. m.phil malaysia management accounting manual accounting manufacturing account market marketing mastercard material MBA MCA media migration mobile money ms word ms. excel multi currency in tally 9 Multicurrency Accounting mutual fund national security new and sacrifice ratio new york times new zealand news NGO nonprofit-accounting North Georgia Mountains NPV NSE odbc office oman online application online accounting Online Accounting Course otcei pakistan parents Partnership pay pal pdf Personal Finance pie chart pie chart of income pnb podcast ppf presentation price privacy policy prize money prof. vinod kumar profit profit and loss account project management provision purchase puzzles quickbooks Quote quotes quotes of svtuition rating agency ratio analysis RBI readers real estate rectification of errors remote control reports reserves responsibility accounting retirement revenue Revenue reserves review risk rupees salary sale saudi arabia saving sbi scholarship school SEBI security service tax share share trading Shares shri lanka singapore sms social accounting society solution South Africa stock stock exchange structure student students study subsidiary company svtuition swiss bank tally tally 9 Tally 7.2 Tally 9 Tally.ERP 9 tanzania tax Tax Accounting TDS teacher teaching technology test testimonial testimonials thailand tips trading trading on equity transaction trend trial balance truthfulness tuition twitter UAE UGC - NET Commerce UK United Arab Emirates university usa valuation VAT Video Voucher and vouching Wealth wikipedia working capital youtube
Accounting Education: How to Treat the Under-absorbed Overhead in the Cost Accounts
How to Treat the Under-absorbed Overhead in the Cost Accounts
Accounting Education
Not found any lecture VIEW ALL Continue reading Reply Cancel reply Delete By Home PAGES Lectures View All RECOMMENDED FOR YOU Category ARCHIVE SEARCH ALL Lectures Not found any lecture match with your request, please help to write it and send it to our email at for making this website free accounting and finance encyclopedia. Back Home Sunday Monday Tuesday Wednesday Thursday Friday Saturday Sun Mon Tue Wed Thu Fri Sat January February March April May June July August September October November December Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec just now 1 minute ago $$1$$ minutes ago 1 hour ago $$1$$ hours ago Yesterday $$1$$ days ago $$1$$ weeks ago more than 5 weeks ago Followers Follow THIS CONTENT IS PREMIUM Please share to unlock