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the variable production overhead vary with level of activity.So it easy to calculate.But the fixed production overhead will not vary.So based on budgeted figures of fixed production overhead and on budgeted level of activity we calculate the overhead absorption rate so that we can get to know the cost of production and set the selling price. Later on we compare it to the actual overhead to find out whether it is over/under absorbed.
am i rightwhile direct material,direct labor all these direct cost are calculated as and when they are incurred and directly link it to the cost units.so direct costs are calculated on actual basis and not on budgeted basis
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