Explain Absorption

Question

Give a short introduction of the term ‘Absorption’? And also write down its various methods employed for deciding the rates of overhead absorption?

Answer 1

Absorption is the technique where each and every product or job acquires the loading of the overheads while it is moving through the production department. It is also termed as recovery of overheads.

The various techniques employed for deciding the rates of overhead absorption are illustrated below:

i) Direct material cost percentage rate
ii) Direct wage percentage rate
iii) Prime cost percentage rate
iv) Labor hour rate
v) Machine hour rate