# Overhead Under and Over Absorption Calculator

> Source: https://netray.co/tools/overhead-under-over-absorption-calculator
> Publisher: Netray (netray.co), AI and integration engineering for ERP and manufacturing systems.
> Section: Free Tools

## Short answer

Find under or over absorbed overhead for the period and see how much comes from spending versus volume.

## Category

cost-finance

## Audience

- Cost accountant
- Controller
- CFO

## Tool

**Kind:** calculator

**Currency:** $

**Inputs:**

#### Budgeted overhead

**Key:** budget_oh

**Type:** number

**Default:** 480000

**Min:** 0

**Step:** 5000

**Unit:** $

**Help:** Total overhead in the budget for the period.

#### Budgeted activity

**Key:** budget_hours

**Type:** number

**Default:** 24000

**Min:** 1

**Step:** 100

**Unit:** hours

**Help:** Labor or machine hours in the budget.

#### Actual overhead

**Key:** actual_oh

**Type:** number

**Default:** 497000

**Min:** 0

**Step:** 5000

**Unit:** $

#### Actual activity

**Key:** actual_hours

**Type:** slider

**Default:** 22500

**Min:** 12000

**Max:** 30000

**Step:** 250

**Unit:** hours

#### Share of production still in inventory

**Key:** inv_pct

**Type:** slider

**Default:** 25

**Min:** 0

**Max:** 100

**Step:** 5

**Unit:** %

**Help:** Used only if you prorate the variance.

**Outputs:**

#### Predetermined rate per hour

**Key:** rate

**Expr:** budget_oh / budget_hours

**Format:** decimal

#### Applied overhead

**Key:** applied

**Expr:** rate * actual_hours

**Format:** currency

#### Over (under) absorbed

**Key:** variance

**Expr:** applied - actual_oh

**Format:** currency

**Primary:** true

**Description:** Positive = over absorbed, negative = under absorbed.

#### Spending variance (favorable +)

**Key:** spending

**Expr:** budget_oh - actual_oh

**Format:** currency

**Description:** Actual overhead against budget.

#### Volume variance (favorable +)

**Key:** volume

**Expr:** applied - budget_oh

**Format:** currency

**Description:** Effect of activity being above or below budget.

#### Variance as percent of actual overhead

**Key:** pct

**Expr:** variance / actual_oh * 100

**Format:** percent

#### Portion to inventory if prorated

**Key:** to_inv

**Expr:** variance * inv_pct / 100

**Format:** currency

#### Portion to cost of sales if prorated

**Key:** to_cogs

**Expr:** variance - to_inv

**Format:** currency

**Chart:**

#### Variance as activity changes

**Type:** line

**X:** actual_hours

**From:** 12000

**To:** 30000

**Steps:** 30

**Series:**

- variance
- volume

**Disclaimer:** Treat as a planning aid. Your accounting policy and auditors decide whether variances go straight to cost of sales or are prorated.

## Content

**Intro:** When actual activity or spending differs from budget, overhead applied to products does not match the overhead you actually spent. This calculator shows the under or over absorbed amount and breaks it into spending and volume effects, so you know whether to fix cost control or the volume plan.

**Sections:**

#### How to use the calculator

**Body:** Enter budgeted overhead and activity, which set the predetermined rate. Then enter actual overhead and actual activity for the period. The result shows applied overhead and the net over or under absorbed amount. Move the actual activity slider to see the chart of how the variance changes with volume. If you plan to prorate the variance across inventory and cost of sales, set the share still in inventory to see the split.

#### The formulas

**Body:** Rate = budgeted overhead divided by budgeted activity. Applied = rate times actual activity. Over or under absorbed = applied minus actual overhead. Spending variance = budget minus actual overhead, favorable when positive. Volume variance = applied minus budgeted overhead, favorable when activity beats budget. The spending and volume variances add up to the total. This treats all overhead as one pool; if you separate fixed and variable overhead you will get a finer breakdown.

#### Reading the result

**Body:** In the default case the plant ran 1,500 hours below plan and spent 17,000 above budget, so overhead is under absorbed by about 30,000 to 40,000. Most of the gap is volume: fixed overhead was not fully recovered because activity was low. A volume-driven variance points to scheduling and demand, while a spending variance points to cost control. The chart shows the break-even activity where the variance crosses zero.

#### Common mistakes

**Body:** Confusing sign conventions causes the most trouble, so label favorable and unfavorable clearly. Using the wrong activity measure also distorts results, for example budgeting machine hours but applying on labor hours. Finally, small variances are often closed to cost of sales, while large ones are prorated; apply your policy consistently and document it.

**Cta:** If you want these variances produced automatically from your ERP cost and activity data each period, Netray can discuss how that reporting could be set up.

**Faq:**

#### What is under absorbed overhead?

**Answer:** Under absorbed overhead means the overhead applied to products through the predetermined rate was less than the overhead actually incurred. Product costs were understated, and the difference is charged to cost of sales or prorated.

#### What is the difference between spending and volume variance?

**Answer:** Spending variance compares actual overhead with budget. Volume variance compares applied overhead with budget and arises because activity differed from the plan. Together they explain the total over or under absorption.

#### Is over absorbed overhead good?

**Answer:** Not necessarily. It means applied overhead exceeded actual overhead, which can come from high activity or low spending. It may signal that rates are set too high or that production ran above plan, and the surplus is credited back to cost of sales.

#### How is the variance treated in the accounts?

**Answer:** Small variances usually go to cost of sales. Material variances are prorated across work in process, finished goods and cost of sales. Follow your accounting policy and the guidance of your auditors.

## Search terms

under absorbed overhead calculator, over absorption of overhead calculator, overhead volume variance calculator, overhead spending variance, manufacturing overhead variance calculator, absorption costing variance, overhead applied vs actual

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