Implications of under absorption of overhead costs into products?

Question

As a business manager, what might be the implications for your business if you found at the end of the trading year that there had been a significant under-absorption of overhead costs into products?

Answer 1

Impact in P&L:

In your management accounts, your cost of production is understated and operational profit is overstated. But when you come to your net profit it gets corrected as the remaining overhead is taken off.But your net profit is still wrong as closing stock is undervalued.

Impact on BS

undervalued closing stock and profit for the period set off each other.

Departmental reporting. It would appear as the production department is performing well. Some companies pay bonus based on operational profits and the calculation may be inaccurate.