Overheads absorption Rate

In both cases, we take the total overheads and divide by the total labour hours (or machine hours – whichever you are told to do) to get an overhead cost per hour (the absorption rate).

For a single factory wide absorption rate, we the total overheads of the whole factory and divide by the total hours in the whole factory.

For separate departments we calculate an absorption rate for each department individually by dividing the overheads in the department by the hours worked in that department.

In real life, you do whatever you want – there are no rules for management accounting and you do whichever you feel is more useful. Calculating an absorption rate for each department separately is going to obviously be more ‘accurate’ but does involve more work.

In exams, we calculate separate rates for each department (when relevant) unless the question specifically asks for a factory wide absorption rate.

Have you watched my free lecture on overhead absorption? If not, you might find it helpful.