Overhead Absorption

Question 1

Describe Allocation, Apportionment and Absorption

Answer 1

Allocation: a cost specific to a department - indirect material, indirect wages

Apportionment: the distribution of the general costs to the different cost centres - rent, water and electricity

Absorption: used to distribute overhead costs among cost units using OAR (= Budget Cost/ Budget MH/DLH) - overheads

Question 2

Describe how a blanket rate is calculated.

Answer 2

This is one OAR for the whole organisation instead of a different rate for each cost centre. It is easier and faster to calculate and involves less administration tasks.

= Total Overheads / Total Machine Hours

Question 3

Explain ONE advantage of using a pre-determined overhead absorption rate for each
department.

Answer 3

OH can be charged to production units, thus it facilitates pricing.

It is a tool for pricing and helps to calculate the cost of jobs. And they provide the business with a control system.

Question 4

What are over/under absorbed overheads? Why do they occur?

Answer 4

Absorption rates are prepared using budgeted information. Thus, the OH charged to cost units is unlikely to agree with the amount of actual OH incurred.

Over Absorption = OH budget > actual OH
Under Absorption = OH budget < actual OH