How to work out an overhead absorption rate
An absorption rate charges a department's overheads to products by the hour. Work out a machine hour rate and a labour hour rate.
Task 1From department to product2 questions
Absorption is the last step. It charges a department's overheads to the products that pass through it.
The absorption rate is budgeted overheads divided by budgeted hours. It is set before the year starts, because actual overheads are not known until the year is over and jobs must be priced before then.
- Machine hour rate
- overheads divided by machine hours. It suits a department where machines do most of the work
- Labour hour rate
- overheads divided by direct labour hours. It suits a department where people do most of the work
Task 2Work out the two rates2 questions
Task 3Charge overheads to a product5 questions