Absorption Costing

Hopefully this will help: Absorption costing is a way of putting through an estimate of overheads rather than waiting for actual invoices to come in. You can absorb on machine hrs, labour hrs or per unit - these are the main methods. So pretend you have budgeted at $210,000 overheads to make two products X & Y in total you estimate to use 100,000 machine hours that means an estimated OAR of $2.10 per unit. So when you make your units only 70,000, you put through your estimate of $2.10 * 70,000 = $147,000 Your actual invoice comes in at the end of the period and it comes to $152,000 so you have under absorbed by $5,000 another way of thinking of this is under guessed.