Work out overhead absorption instantly with clear inputs, formula shown and shareable results.
An absorption rate is set before the period from budgeted overhead and budgeted activity. At the end of the period, absorbed overhead rarely equals actual overhead: the difference splits into an expenditure element (actual spend versus budget) and a volume element (actual activity versus budget).
Absorption rate
Rate = Budgeted overhead / Budgeted activity
Absorbed overhead
Absorbed = Rate x Actual activity
Over/under absorption
Difference = Absorbed - Actual overhead
It is written off to the income statement in the period, so a volume shortfall hits profit twice — once through lost contribution and once through under-absorption.
Whichever drives the overhead: machine hours for capital-intensive work, labour hours for assembly, and units only where products are near-identical.