Management Accounting · Accounting for material, labour and overheads

Over- and Under-Absorbed Overheads Explained for ACCA MA

Updated 11 October 2026 · Fact-checked

Over- or under-absorbed overhead is the difference between overhead absorbed into production and overhead actually incurred. Absorbed = actual activity × predetermined rate. If absorbed is less than actual, overhead is under-absorbed and profit falls. If absorbed is more than actual, it is over-absorbed and profit rises.

Understand Over- and Under-Absorption of Overheads

Businesses cannot wait until year end to know their overhead cost per unit. So they set a predetermined overhead absorption rate before the period starts. The rate is budgeted overhead divided by budgeted activity, such as labour hours, machine hours or units.

During the period, each unit or job is charged overhead using that rate and the actual activity. This is the overhead absorbed. At the same time, the business pays the real overhead costs. This is the overhead incurred.

The two figures almost never match. Either the actual overhead differs from budget, or the actual activity differs from budget, or both. The difference is the under- or over-absorption.

Under-absorbed: absorbed is lower than incurred. Costs were not fully charged to products, so you must add the shortfall as an extra expense. Profit is reduced.

Over-absorbed: absorbed is higher than incurred. Products were charged too much, so you reduce expenses by the excess. Profit is increased.

In the ledger, absorbed overhead is credited to the overhead control account and debited to work in progress. Actual overhead is debited to the overhead control account. The balance left is the under- or over-absorption, and it is written off to the statement of profit or loss at period end.

Key formulas to remember

Predetermined absorption rate: Rate = Budgeted overhead ÷ Budgeted activity level; Activity can be labour hours, machine hours or units. Use the base the question gives.
Overhead absorbed: Absorbed = Actual activity × Predetermined rate; Always use actual activity, not budgeted activity.
Under- or over-absorption: Absorbed − Actual overhead incurred; Positive result = over-absorbed. Negative result = under-absorbed.
Effect on profit: Under-absorbed: reduce profit. Over-absorbed: increase profit.; Applies when profit has been calculated using absorbed overhead.
Ledger entries for absorption: Dr Work in progress, Cr Overhead control (absorbed). Dr Overhead control, Cr Bank/payables (incurred).; The balance on the overhead control account is the under- or over-absorption.

How to solve Over- and Under-Absorption of Overheads questions

Use this order for any question on under- or over-absorbed overheads. Keep the figures in a small working so you can check the sign.

1Find the predetermined rate: budgeted overhead ÷ budgeted activity. Use the rate if it is given.
2Identify the actual activity for the period.
3Calculate overhead absorbed: actual activity × rate.
4Identify the actual overhead incurred.
5Subtract: absorbed − incurred. A positive answer is over-absorbed; a negative answer is under-absorbed.
6State the label clearly: over or under, and the amount.
7Adjust profit: deduct under-absorption, add over-absorption. Or post to the overhead control account and then to the statement of profit or loss.
8Check the answer type: number entry may need only the amount, a multiple choice may need the label too.

Quickest way: Absorbed minus incurred, then read the sign

When to use it: Use this for any objective test question that gives a rate and actual figures.

Multiply actual hours or units by the rate to get absorbed overhead.
Write down actual overhead incurred.
Compare: if absorbed is bigger, it is over-absorbed; if smaller, under-absorbed.
Under means profit goes down; over means profit goes up.
If only budget figures are given, compute the rate first, then repeat the steps.

Common mistakes in Over- and Under-Absorption of Overheads

Using budgeted activity instead of actual activity to calculate overhead absorbed
The rate itself uses budgeted activity, so students carry it into the next step.
Fix: Budget is only for the rate. Absorbed overhead always uses actual activity.
Getting over and under the wrong way round
Students compare the wrong way or think 'over' means too much cost incurred.
Fix: Over-absorbed means too much was absorbed into products. Absorbed above incurred = over.
Adjusting profit in the wrong direction
Students link 'over' with a bad outcome.
Fix: Over-absorption is a credit to profit or loss, so profit rises. Under-absorption is a charge, so profit falls.
Using budgeted overhead as the actual overhead incurred
Both figures appear in the question and look alike.
Fix: Underline which figure is actual. Compare absorbed with actual, never with budget.
Reversing the debit and credit in the overhead control account
Students forget that absorption credits the control account.
Fix: Remember: incurred is debit, absorbed is credit. A debit balance is under-absorbed; a credit balance is over-absorbed.
Using the wrong absorption base
The question gives hours and units, and students pick the wrong one.
Fix: Use the base the rate is stated in, such as per machine hour. Check the unit of the rate.

Worked examples

Example 1

A company budgets production overhead of $240,000 and 40,000 labour hours. Actual overhead was $255,000 and actual labour hours were 41,000. Calculate the overhead under- or over-absorbed.

Show the solution

Rate = $240,000 ÷ 40,000 = $6 per labour hour.
Absorbed = 41,000 × $6 = $246,000.
Incurred = $255,000.
Absorbed − incurred = $246,000 − $255,000 = −$9,000.
The result is negative, so overhead is under-absorbed.

Answer: Overhead is under-absorbed by $9,000. This is charged against profit, so profit is reduced by $9,000.

Example 2

A business uses a rate of $8 per machine hour. Actual machine hours were 12,500 and actual overhead incurred was $96,000. Reported profit before adjustment is $50,000. Calculate the under- or over-absorption, state the overhead control account balance, and give the adjusted profit.

Show the solution

Absorbed = 12,500 × $8 = $100,000.
Incurred = $96,000.
Absorbed − incurred = $100,000 − $96,000 = $4,000 positive, so over-absorbed.
Overhead control account: debit $96,000 (incurred), credit $100,000 (absorbed). The credit balance is $4,000.
Over-absorption is transferred to the statement of profit or loss as a credit, increasing profit.
Adjusted profit = $50,000 + $4,000 = $54,000.

Answer: Overhead is over-absorbed by $4,000, shown as a $4,000 credit balance on the overhead control account. Adjusted profit is $54,000.

Exam tips

Write the rate, absorbed figure and incurred figure in three lines before you pick an answer. Most wrong answers come from mixing these up.
In multiple choice, watch for options that give the right amount with the wrong label. Check over versus under.
For number entry, check whether the question wants a positive amount only or a sign. Read the instruction on how to enter the answer.
In Section B, if asked for a journal or ledger account, remember the control account balance equals the under- or over-absorption.
If the question states the rate, do not recalculate it from budget figures. Use what is given.

Practice questions from Accounting for material, labour and overheads

Over- and Under-Absorption of Overheads in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Over- and Under-Absorption of Overheads: frequently asked questions

What causes under-absorbed overhead?

It happens when actual overhead is higher than expected, when actual activity is lower than budgeted, or both. The rate was set on budget figures, so any difference shows up as under- or over-absorption.

Is under-absorbed overhead a loss?

It is an extra charge to the statement of profit or loss, so it reduces profit. It exists because products were charged less overhead than the business actually incurred.

How do you record over-absorbed overhead in the ledger?

Absorbed overhead is credited to the overhead control account and incurred overhead is debited. If the credit is larger, the balance is over-absorbed. You then debit the overhead control account and credit the statement of profit or loss to clear it.

Do under- and over-absorption matter in marginal costing?

Under marginal costing, fixed overheads are not absorbed into product cost. They are charged as a period cost, so there is no under- or over-absorption of fixed overhead. The topic mainly applies to absorption costing.