Over-absorption of overheads occurs when:

• A. Budgeted overheads exceed actual costs.
• B. Actual costs exceed budgeted overheads.
• C. Overheads are not allocated.
• D. Overheads are allocated to non-production activities.

Answer: (A)

Over-absorption happens when the amount charged to production for overheads is more than the overheads actually incurred. In standard costing, we apply a predetermined overhead rate to production to absorb overheads into products. If that rate is based on budgeted (estimated) overheads and those budgeted costs are higher than what was really spent, applying that rate to actual production will push more overheads into cost of production than the true cost. The result is an over-absorption, which shows up as absorbed overheads exceeding actual overheads.

So, when budgeted overheads exceed actual costs, the absorbed figure ends up higher than what was spent, fitting the idea of over-absorption. If actual costs were higher than what was absorbed, that would indicate under-absorption. The other options describe scenarios that either involve no allocation or misallocation, not the situation of absorbing more than was incurred.