Q.A department absorbs overhead on a predetermined machine hour rate. The rate was fixed on estimated overhead of ₹1,00,000 and estimated 10,000 machine hours. During the period the actual overhead incurred was ₹1,05,000 and the actual machine hours worked were 9,500. Compute the predetermined rate, the overhead absorbed, and the amount of under- or over-absorption.

Over-absorption = overhead absorbed is greater than overhead actually incurred.

Overheads are usually absorbed into products using a predetermined overhead rate. If the amount so absorbed turns out to be MORE than the actual overhead incurred during the period, the difference is over-absorption (over-recovery). It arises when actual overhead is lower than estimated or actual output/hours are higher than estimated. The over-absorbed amoun …

The underlined "under-absorption" is wrong — actual overhead being less than absorbed overhead means overhead has been over-absorbed.

Overhead is charged to production at a predetermined (budgeted) rate, so the absorbed amount rarely equals the actual:

Under-absorption means absorbed overhead < actual overhead, leaving a shortfall to be adjusted.

Overheads are recovered from production using a predetermined absorption rate (budgeted overhead ÷ budgeted base). If, at the end of the period, the overhead actually incurred is more than the amount absorbed, the difference is under-absorbed (under-recovered) overhead. It arises from under-estimation of overhead, lower-than-expected output, or idle capacity, and is adjusted through a …