Overheads — Absorption Costing

Core concepts

1. 01Overhead absorption — allocating indirect cost to cost objects via rates.
2. 02Methods: % of direct material, direct labour, prime cost, machine hour rate, labour hour rate.
3. 03Primary distribution: allocate to departments. Secondary: reapportion service depts to production.
4. 04Repeated Distribution / Simultaneous Equation method for inter-service department services.
5. 05Under-absorption / over-absorption disposed via supplementary rate, costing P&L, or carry forward.

Exam-critical pointers

• ⭐Machine Hour Rate preferred where machine work dominates over labour.
• ⭐Simultaneous equation method most accurate for service-to-service sharing.
• ⭐If under-absorption due to abnormal causes — debit to costing P&L.
• ⭐Capacity utilisation impacts absorption rate — distinguish budgeted vs normal capacity.