Overhead absorption rates

In this lesson

1. 0:00 Introduction to overhead absorption rate
2. 2:19 Why we use budgeted figures for calculations
3. 5:32 Choosing the right activity level basis
4. 9:13 Worked example: Cooper Co overhead rates
5. 17:33 Over and under absorption explained
6. 25:11 Calculating over/under absorption in practice
7. 27:46 Working backwards through absorption calculations

About this lesson

Overhead absorption rates allow you to estimate the production overhead cost per unit of activity—whether that's per machine hour, labour hour, or unit produced—so you can build a complete picture of what it costs to make each product. This is a core technique in Performance Management and Financial Management papers, and it directly supports pricing decisions and financial reporting. You'll work through the key calculation: budgeted production overheads divided by budgeted activity level. The lesson shows you how to choose the right activity basis for your department. If a department is machine intensive, you'll use machine hours; if it's labour intensive, you'll use labour hours. You'll see how different products place different demands on departments, which is why using units produced alone isn't appropriate for multi-product businesses. The session includes a worked example using Cooper Co, a business with three production departments, demonstrating how to calculate separate overhead absorption rates for cutting, assembly, and finishing departments. You'll also explore what happens when actual overheads and activity levels differ from budget. This creates an over-absorption or under-absorption, which you'll need to calculate and adjust for in your accounts. The lesson covers the straightforward calculation of over and under absorption, plus how to work backwards through the formula when a question gives you some figures but asks you to find others. By the end, you'll be confident applying this technique to exam questions and understanding its practical purpose in management accounting.

Duration: 31m