Accounting treatment of under or over absorption:
Under or over-absorption of overheads may be treated in one or more of the following methods:
Use of supplementary rates:
If the difference between predetermined and actual is considerable and it had been caused due to wrong valuation of overhead rates. The under absorption or over absorption of overhead cost is distributed between finished stock, work in progress and cost of sales by means supplementary rates.
By writing off costing profit and loss account: Where the under absorption or over-absorption is not large it may be written off to costing profit and loss a/c.
Carried over to subsequent year: The under absorption or over-absorption of overheads may be carried over to the next year.