Under or over absorption is caused by the actual fixed overhead and production volume being different from those figures used to calculate the predetermined rate.

Related MCQs

• Variable overhead is overhead that increases as more production work is done. Total variable overhead expenditure therefore depends on the volume of production. Variable overhead is usually calculated as an amount for each direct labour hour worked.
• Overheads are usually added to cost units using a predetermined overhead absorption rate, which is calculated using figures from the budget.
• Predetermined absorption rates is where, the absorption rate calculated in advance using estimates for cost and production volume in the annual financial plan or budget.
• Which of the following procedure is incorrect for attributing overhead costs to cost units? I. Collecting production overhead costs by item II. Establishing cost centres III. Allocating and apportioning overhead costs to cost centres IV. Apportioning service cost centre costs to production cost centres V. Absorbing production cost centre costs into cost units
• A blanket overhead absorption rate is an absorption rate used throughout a factory and for all jobs and units of output irrespective of the department in which they were produced.
• A predetermined overhead absorption rate is also known as:
• Overhead absorption is the process whereby overhead costs allocated and apportioned to production cost centres are added to unit, job or batch costs.
• The absorption rate may be calculated by the fraction: • Total overhead costs • Total of absorption basis.
• A single overhead absorption rate might be used for all the production departments in the factory.
• Overhead absorption is sometimes called overhead recovery.