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Forums › ACCA Forums › ACCA MA Management Accounting Forums › Overhead absorption rate
Why is overhead absorption rate based only on budgeted figures??
Because we need to calculate a standard cost in advance.
There are several reasons for this, but the most obvious is that you need to be able to quote a selling price to customers.
Obviously you cannot fix a selling price until you know the cost.
But if you are making desks and a customer wants to know the price, you can’t tell the customer to wait until you have made it.
We have no choice but the estimate the costs in advance which means that we have to calculate the absorption rate based on what we expect (i.e. on budgeted figures).
(All the other costs will usually be estimates as well. When we find out later what the actual costs are, then we can compare and calculate variances, but this of course is a separate part of the syllabus.)