Course Outline
Join PRO

What is the meaning of fixed overhead absorbed?

Author:
Harold Averkamp, CPA, MBA

Definition of Fixed Overhead Absorbed

Fixed overhead absorbed refers to a manufacturer’s fixed indirect manufacturing/production costs. Since these costs are indirect, they must be assigned or allocated to the products manufactured. This is required because U.S. accounting principles and income tax regulations require manufacturers to follow full absorption costing. This means that the cost of manufactured goods must include the costs of the direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead. Accountants will state that the goods produced must absorb the fixed manufacturing overhead costs.

It is common that the fixed manufacturing overhead costs are absorbed by the goods produced (or are assigned/allocated to the goods produced) through predetermined overhead rates based on the number of machine hours.

Example of Fixed Overhead Absorbed

Assume that TOPCO has budgeted next year’s fixed manufacturing overhead costs to be $2,000,000 (consisting of depreciation on its equipment, salaries of the managers involved in the manufacturing operations, utilities, etc.). TOPCO also anticipates there will be 100,000 machine hours (MHs) involved in the production of goods. Therefore, the company will be assigning to the goods produced (and the goods will be absorbing) the fixed manufacturing overhead costs at the rate of $20 per MH.

If the actual production volume is less than the planned volume (and the costs are as planned) the fixed manufacturing overhead will be underabsorbed. When the actual volume exceeds the planned volume (and the costs are as planned) the fixed manufacturing overhead will be overabsorbed.

Join PRO to Track Progress

Features

Free

PRO

Lifetime Access (One-Time Fee)
Explanations
Quizzes
Q&A
Dictionary
Bookkeeping Video Training
Financial Statements Video Training
Visual Tutorials
Quick Tests
Quick Tests with Coaching
Cheat Sheets
Flashcards
Crossword Puzzles
Word Scrambles with Coaching
Bookkeeping Study Guide
Managerial and Cost Accounting Study Guide
Certificates of Achievement
Bookkeeping Certificate of Excellence
Business Forms
Printable PDF Files
Progress Tracking
Motivational Badges and Points
Motivational Medal Rankings
Motivational Activity Streaks
Public Profile Page of Achievements

About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

Read 3,033 Testimonials

PRO for Teams
  • Convert your existing PRO account to a "Team" account for free
  • Easily add new PRO users and admins to your team
  • Monitor team progress, average grades, recent activity, achievements, and more
PRO for Teams
Take the Tour Join Pro Upgrade to Pro