CIMA BA2 Syllabus C. PLANNING AND CONTROL - Absorbing Production Overheads - Notes ^{2 / 3}

Remember!

• The indirect costs of production (materials, labour and expenses) are debited in the production overhead account (see below in the picture)

• Absorbed production overheads (O.A.R. X Actual Activity level) are credited to the production overheads account

• If debit is more than credit, then this is under absorption and will be credited to the production overhead account (see below in the picture)

• If debit is less than credit, then this is over absorption and will be debited to the production overhead account

Any over- or under- absorption should be transferred to the income statement at the end of the accounting period.

If it is Under-absorption then debited as a loss to the income statement.

If it is Over-absorption then credited as a profit to the income statement.

Integrated System

What we have been looking at so far is known as an integrates system. 

It is where we have one set of accounts that looks at the financial accounts and the cost information.

However, because it is particularly been done for cost information, there will be a lot more detailed cost analysis that may not be needed for financial accounts, but overall it does save time as it is integrated.

There is another system that splits these two from each other and then they are interlocked, this is known as an interlocking system