Overhead abosrption

Question 1

What does absorption mean?

Answer 1

It means that the overheads for a cost centre are shared between the units it has produced

Question 2

How to share overheads for a cost centre between units produced?

Answer 2

1: Calculate hourly overhead absorption rate (OAR)
2: Multiply OAR by number of hours needed to make each unit

Question 3

When to use an OAR for labour or machine hours?

Answer 3

Depending on whether the cost centre is more labour or capital intensive?

Question 4

Overhead Absorption Rate =

Answer 4

Budgeted labour/machine hours in cost centre

Question 5

What does under-absorption mean?

Answer 5

It means that the value of overheads absorbed by production costs is lower than the actual value of overheads.

Question 6

What does over-absorption mean?

Answer 6

It means that the value of overheads absorbed by production costs is higher than the actual value of overheads.