Business, Legal & Accounting Glossary
Absorbed overhead is manufacturing overhead that has been applied to products or other cost objects. Overhead is usually applied based on a predetermined overhead allocation rate.
The amount of the overhead of an organisation charged to, or borne by, the production of that organisation for the accounting period under consideration when the technique of absorption costing is used. The absorbed overhead is calculated by multiplying the actual production for the period by the absorption rate.
A production overhead that has been applied to products or other cost objects is known as an absorbed overhead. Overhead is often calculated using a specified overhead allocation rate. When the amount allocated to a product or other cost item is greater than the real amount of overhead incurred, the amount is overabsorbed, and when the amount allocated is less than the actual amount of overhead spent, the amount is underabsorbed.
The overhead allocation rate should be tweaked over time to correlate the amount of overhead absorbed with the amount of overhead actually incurred. As a result, the amount of overhead that is overabsorbed and underabsorbed should finally balance out.
Absorbed overhead is also known as applied overhead. Underabsorbed overhead is also known as underapplied overhead, while overabsorbed overhead is also known as overapplied overhead.
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This glossary post was last updated: 13th April, 2022 | 0 Views.