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Overhead absorption rate

An overhead absorption rate is overhead cost divided by the quantity of the chosen absorption base. A predetermined rate uses budgeted overhead and budgeted activity, providing timely product costs before actual period totals are known. An actual rate uses actual totals but can fluctuate with activity and become available too late for pricing. Specify the cost centre, period and base; under- or over-absorption may result when a predetermined rate is applied.

Worked example

Budgeted overhead is $120,000 and budgeted labour hours 30,000. The predetermined rate is $4 per labour hour; 500 actual hours absorb $2,000.

Common mistake

Do not divide budgeted overhead by actual hours when calculating a predetermined budget-based rate.

Where it appears in your exams

QualificationExamRelationshipPeriod
ACCA MA Direct September 2026–June 2027
FIA FMA Direct September 2026–June 2027