Absorption base
An absorption base is the activity measure used to charge overhead to output, such as direct labour hours, machine hours or units. Divide the relevant overhead total by activity measured on that base to calculate a rate, then apply it to the output’s activity. Select a base consistent with resource use and the question’s assumptions. A unit-based rate may be unsuitable when products differ substantially in processing requirements.
Worked example
Budgeted overhead of $50,000 and 10,000 machine hours give a $5 machine-hour rate. A product using three machine hours absorbs $15.
Common mistake
A machine-hour rate must be multiplied by machine hours, not labour hours or the number of units.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | MA | Direct | September 2026–June 2027 |
| FIA | FMA | Direct | September 2026–June 2027 |
