UK Accounting Glossary
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.
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.
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This glossary post was last updated: 27th January 2019.