Question

Which is a better method for writing off underabsorbed and overabsored overhead

Answer 1

There are three methods for Treatment of over and under absorption of overheads

i) Writing off to costing p&L a/c :- Small difference between the actual and absorbed amount should simply be transferred to costing p&l a/c,If difference is large then investigate the causes and after that abnormal loss shall be transferred to costing p&l a/c .

ii)Use of supplementary rate: Under this method the balance of under and over absorbed overheads may be charged to cost of WIP,finished stock and cost of sales proportionately with the supplementary rate of overhead.

iii)Carry forward to subsequent years: Difference should be carried forward in the expectation that next year the position will be automatically corrected.This would really mean that costing data of two years would be wrong .

*First method is more better because when there is over or under absorption profit or loss will not be overstated or understated.Because according to first method, the total unabsorbed overhead amount will be written off to the costing profit and loss account. The use of this method will reduce the profits of the concern by that amount for the period.