Overhead Under and Over Absorption Calculator
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.
Your numbers
Total overhead in the budget for the period.
Labor or machine hours in the budget.
Used only if you prorate the variance.
Your results
Treat as a planning aid. Your accounting policy and auditors decide whether variances go straight to cost of sales or are prorated.
Variance as activity changes
Sweeps Actual activity from 12000 to 30000, holding your other inputs fixed.
Automated overhead variance reporting
Optional: see how monthly overhead variance analysis can be generated from your ERP data.
Optional. The tool and every export work without this. No spam.
How to use the calculator
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
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
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
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.
Frequently Asked Questions
What is under absorbed overhead?
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?
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?
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?
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.
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.
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