Absorption rate, also known as overhead absorption rate or recovery rate, is a crucial concept in absorption costing systems used to allocate overhead costs to production. This detailed guide covers the calculation methods, usage, and comparisons with modern costing systems.
In a system of standard costing, the fixed overhead capacity variance measures the difference between the actual hours worked and the budgeted capacity available, valued at the standard fixed overhead absorption rate per hour.
In a system of standard costing, the fixed overhead efficiency variance represents the difference between the actual labor hours worked and the standard time allowed for the quantity actually produced, valued at the standard fixed overhead absorption rate per hour.
Normal Volume refers to the volume of activity used to determine the overhead absorption rate in a system of absorption costing. It is generally the budgeted volume of production for a specific period.
An overhead absorption rate (OAR) is a method used in cost accounting to allocate overhead costs to products or services based on a predefined absorption basis.
Overhead cost absorbed refers to the overhead costs allocated to the actual production during a period, calculated by multiplying actual production by the budgeted overhead absorption rate.
A standard cost for the fixed and/or variable overhead of an operation derived from the standard time allowed for the performance of the operation or the production of a product and the standard overhead absorption rate per unit of time for that operation or product.
