Under-absorption is the situation where which of the following occurs?

Under-absorption is the situation where which of the following occurs?

• A. Absorbed overhead equals actual overhead
• B. Overheads absorbed are greater than actual overheads
• C. Actual overhead is greater than absorbed overhead
• D. Overheads absorbed are less than actual overheads

Answer: (D)

Under-absorption happens when the overheads charged to production (absorbed) are lower than the overheads actually incurred. In other words, absorbed < actual. This means some overhead cost wasn’t allocated to production and shows up as an unfavorable variance that may need to be charged to profit or investigated. If absorbed were equal to actual, there would be no variance, and if absorbed were higher than actual, that would be over-absorption.

Under-absorption happens when the overheads charged to production (absorbed) are lower than the overheads actually incurred. In other words, absorbed < actual. This means some overhead cost wasn’t allocated to production and shows up as an unfavorable variance that may need to be charged to profit or investigated. If absorbed were equal to actual, there would be no variance, and if absorbed were higher than actual, that would be over-absorption.