Overhead absorption
Overhead absorption charges production overhead from cost centres to products, jobs or services using an absorption rate and an activity measure. It follows allocation, apportionment and any service-centre reapportionment. A labour-hour or machine-hour rate should reflect how the centre’s resources are used. The absorbed amount is an assigned cost based on the chosen rate; it is not necessarily the overhead actually spent during the period.
Worked example
A machine-hour rate is $6. A job uses 15 machine hours and absorbs $90 of production overhead.
Common mistake
Multiplying by budgeted hours gives budgeted overhead, not the overhead absorbed by the actual output unless the hours happen to match.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | MA | Direct | September 2026–June 2027 |
| FIA | FMA | Direct | September 2026–June 2027 |