UK Accounting Glossary
In absorption costing, production may be expressed in a number of different ways; the way chosen to express production will ultimately determine the absorption rate to be used. The seven main methods of measuring production, together with their associated absorption rates, are detailed below. The absorption rate is used in the accounting period to obtain
The rate or rates that are calculated in an absorption costing system in advance of an accounting period of the purpose of charging the overheads to the production of that period.
Absorption rates are calculated for an accounting period using the following equation:
budgeted overhead / budgeted production.
The seven main methods of measuring production, together with their associated absorption rates, are detailed below.
The absorption rate is used in the accounting period to obtain the absorbed overhead by multiplying the actual production achieved by the absorption rate.
These rates have been utilised by accountants for more than a century and are still widely applied. Some, however would argue that these rates can’t provide the accuracy in terms of the cause and effects allocations of costs that modern managers require; in this instance a system of activity based costing ought to be used.
The rate of absorption is the predetermined rate at which overhead costs are charged to cost objects (such as products, services, or customers).
The rate of absorption drives the amount of overhead costs that are capitalised into the balance sheet of a business.
Overhead absorption is the amount of indirect costs assigned to cost objects. Overhead absorption is a necessary part of the requirement by both the GAAP and IFRS accounting frameworks to include overhead costs in the recorded amount of inventory that is shown in a company’s financial statements.
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
Definitions for Absorption Rate are sourced/syndicated from:
This glossary post was last updated: 27th January 2019.