If actual overhead is greater than overhead absorbed, what is this called?

If actual overhead is greater than overhead absorbed, what is this called?

• A. No absorption
• B. Break-even
• C. Under-absorption
• D. Over-absorption

Answer: (C)

In cost accounting, overheads are allocated to production using a predetermined rate. When the actual overhead costs turn out higher than the amount absorbed into production, that difference is called under-absorption (under-recovery). It means you haven’t charged enough overhead to the products. For example, if the standard rate would absorb 500 in overhead for the actual activity, but the real overhead incurred is 550, you have under-absorption of 50. In the books, this under-absorbed amount is typically treated as an expense, increasing reported costs or reducing profit, unless adjustments are made. The opposite situation—where absorbed overhead exceeds actual overhead—is called over-absorption (over-recovery). The other options don’t describe this scenario: break-even is a separate concept related to revenue and costs, and no absorption would mean no overhead is allocated at all.

In cost accounting, overheads are allocated to production using a predetermined rate. When the actual overhead costs turn out higher than the amount absorbed into production, that difference is called under-absorption (under-recovery). It means you haven’t charged enough overhead to the products.

For example, if the standard rate would absorb 500 in overhead for the actual activity, but the real overhead incurred is 550, you have under-absorption of 50. In the books, this under-absorbed amount is typically treated as an expense, increasing reported costs or reducing profit, unless adjustments are made.

The opposite situation—where absorbed overhead exceeds actual overhead—is called over-absorption (over-recovery). The other options don’t describe this scenario: break-even is a separate concept related to revenue and costs, and no absorption would mean no overhead is allocated at all.