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ACCA Applied Knowledge · Management Accounting · Accounting for material, labour and overheads

Which of the following is the correct accounting treatment at the end of the period when production overheads have been over-absorbed?

Over-absorbed overheads are written back by debiting the overhead control account and crediting the statement of profit or loss. Costs charged to production exceeded actual costs, so profit was understated, and the adjustment increases profit for the period.

  1. ADebit the overhead control account and credit the statement of profit or loss, increasing profitCorrect
  2. BDebit the statement of profit or loss and credit the overhead control account, reducing profit
  3. CDebit work-in-progress and credit the overhead control account
  4. DCarry the balance forward to the next period as a prepayment

Explanation

Over-absorption means more overhead was charged to production than was incurred, so costs have been overstated. The excess is removed by crediting profit or loss, which increases profit, with the debit clearing the overhead control account. Option B describes under-absorption.

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