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Chapter 5: Absorption of overhead
Objectives
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When you have completed this chapter, you will be able to:
- explain the rationale underlying absorption of overheads;
- distinguish between allocation and apportionment of overheads;
- develop and apply apportionment and reapportionment bases;
- appreciate the potential subjectivity inherent in the apportionment exercise;
- distinguish between production (‘front-line’) and service (‘support’) cost centres and understand the need for secondary distribution of service cost centres’ overheads to production cost centres;
- develop overhead absorption rates using different bases and apply them to cost units;
- understand the relative merits of plantwide, departmental, actual and predetermined absorption rates;
- appreciate the significance of normal volume, practical capacity and annual budgeted volume to calculation of absorption rates;
- explain the meaning of over- and underabsorption and calculate their amount in given circumstances.
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