Absorbed Overhead
What is Absorbed Overhead?
Absorbed Overhead is a manufacturing overhead that has been already applied to the product or other cost object in the production process. These are the indirect costs that are assigned to cost objects. Absorption of overhead is done with a predetermined overhead rate. Over-absorption and under-absorption of cost depends on the difference between the allocated overhead and the actual amount of overhead.
Overhead rates should be changed over time according to the overhead actually absorbed. This means under and over absorption of overhead should offset each other.
The formula of Absorbed Overhead:
The formula of absorbed overhead is as follows:
Overhead rates can be divided into two categories: Fixed and Variable.
The formula of Fixed Absorbed Overhead Rate = Fixed Overheads / (Output * Machine Hours)
The formula of Variable Absorbed Overhead Rate = Variable Overheads / (Output * Machine Hours)
