Overhead Absorption Rates (Cambridge (CIE) AS Accounting): Revision Note

Calculation of overhead absorption rates

How do I calculate the overhead absorption rates?

• Overhead absorption rates (OAR) are calculated differently for machine-intensive departments and labour-intensive departments: 

  • For machine-intensive departments:

    • 

  • For labour-intensive departments:

    • 

How do I calculate the overheads absorbed?

• Overheads absorbed is the portion of overhead allocated to the product or service

• For machine-intensive departments:

  • 

• For labour-intensive departments:

  • 

Under-absorption & over-absorption

What is under-absorption?

• Under-absorption occurs when the actual overheads exceed the overheads absorbed 

• This can be caused by:

  • actual expenditure being higher than the budgeted expenditure

  • actual production being lower than budgeted production

What is over-absorption?

• Over-absorption occurs when the overheads absorbed exceed the actual overheads 

• This can be caused by:

  • actual expenditure being lower than the budgeted expenditure

  • actual production being higher than budgeted production

How can under-absorption and over-absorption be calculated?

• Under-absorption and over-absorption can be calculated by: 

  • 

    • If the result is positive then under-absorption has occurred 

    • If the result is negative then over-absorption has occurred