The absorption rate may be calculated by the fraction: • Total overhead costs • Total of absorption basis.

Related MCQs

• Which of the following procedure is incorrect for attributing overhead costs to cost units? I. Collecting production overhead costs by item II. Establishing cost centres III. Allocating and apportioning overhead costs to cost centres IV. Apportioning service cost centre costs to production cost centres V. Absorbing production cost centre costs into cost units
• Variable overhead is overhead that increases as more production work is done. Total variable overhead expenditure therefore depends on the volume of production. Variable overhead is usually calculated as an amount for each direct labour hour worked.
• Overhead absorption is the process whereby overhead costs allocated and apportioned to production cost centres are added to unit, job or batch costs.
• Apportionment means sharing on a reasonable basis. Many overhead costs are costs that cannot be allocated directly to one cost centre, because they are shared by two or more cost centres. These costs are apportioned between the cost centres.
• A blanket overhead absorption rate is an absorption rate used throughout a factory and for all jobs and units of output irrespective of the department in which they were produced.
• The apportionment of production overhead costs might be in two stages: • sharing (or dividing) general costs between production centres and service centres; and • then sharing the costs of the service centres between the production centres.
• Overheads are usually added to cost units using a predetermined overhead absorption rate, which is calculated using figures from the budget.
• In Units basis, Common costs are apportioned between joint products on the basis of the total number of units produced. The cost per unit is the same for all the joint products. (This is also described as the physical quantities basis).
• Overhead absorption is sometimes called overhead recovery.
• Predetermined absorption rates is where, the absorption rate calculated in advance using estimates for cost and production volume in the annual financial plan or budget.