In 2020 the budget for a machine shop showed overheads of $60,000 and volume of activity of 12,000 machine hours. In January of 2020, the machine shop incurred $5,400 of overhead and 1,050 machine hours were worked. Required: a. Determine: i. The predetermined absorption rate.  ii. The under/over absorption rate.  b. With the use of calculation, explain the factors that contributed to the under/over absorption of overheads.

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Overheads

In cost accounting, overhead refers to those expenses which occur during the operating of a business. Overhead includes the fixed, variable, or semi-variable which is not directly involved with a company product or service. It is very important to analyze overhead expense as it helps the company in determining how much a company must charge for its products and services so that they can generate profit.  Overhead expenses depend upon the nature of the business operations.