Overhead absorption rates
Overhead absorption rates (OAR) determine how production overheads are allocated to cost units, enabling organisations to set accurate selling prices before production begins. Using budgeted production overheads and activity levels, rather than actual figures, allows managers to forecast costs reliably and make informed pricing decisions. This lesson demonstrates the practical application of OAR calculations across different industries, equipping you with essential techniques for cost management and financial planning.
This lesson is part of a paid course
Buy the course to unlock every video lesson and the AI Tutor, plus mock exams with feedback on CIMA courses.
Already bought? Sign in
Ask the AI tutor anything about this lesson
It knows every lesson in the course — explanations, clarifications, practice questions.
In this lesson
- 0:00 Introduction to Overhead Absorption Rates
- 1:01 Why Use Budgeted Figures?
- 3:00 Understanding Total Budgeted Activity Level
- 4:00 Practical Example: Breakaway PLC
- 5:46 Calculating Fixed Overhead Per Unit
- 7:17 Conclusion and Recap
About this lesson
Discover the essentials of overhead absorption rates (OAR) and how they crucially impact cost unit calculations and pricing strategies in business. This video simplifies the OAR concept, using practical examples like Breakaway PLC's window production, to demonstrate how budgeted production overheads over budgeted activity levels can guide selling prices before production even starts. Learn the rationale behind using budgeted versus actual figures and how various industries apply these calculations. Gain insights that will empower you to more accurately forecast costs and set competitive prices, enhancing your financial management skills.
Duration: 8m
- Overhead absorption rate (OAR) formula and calculation
- Budgeted versus actual overheads and activity levels
- Total budgeted activity level determination
- Fixed overhead per unit allocation
- Cost unit pricing and management decision-making
- Pre-production cost forecasting
Transcript
Every lesson comes with a full searchable transcript - included with the course.
Get the P1 Objective Test course
All 104 video lessons, timed mock exams marked instantly with an explanation for every question, an AI Tutor in every lesson and lifetime access.
Already bought? Sign in