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If there were a large debit or credit balance in the over/underabsorbed overhead account at the...

If there were a large debit or credit balance in the over/underabsorbed overhead account at the end of a period, what could be some possible explanations?

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Answer #1

Solution:

Overheads may be over or under absorbed based on the following two situations:

1) When the absorbed overhead is higher than the actual overhead incurred, then it is called over-absorbed overhead. This is shown as a credit balance of Overhead Account.

2) When the absorbed overhead is less than the actual ovehead incurred, then it is called under-absorbed overhead. This is shown as a debit balance in Overhead Account.

Note: Absorbed overhead is calculated based on predetermined overhead absorption rate, while the actual overhead refers to the amount of overhead actually spent during the year.

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