The absorption of overheads is also known as the recovery of the overheads. Absorption of overheads is the process of sharing the overhead costs by all the products of a particular department. Absorption of overheads is the application of overheads to each unit of output. In other words, the process of ascertaining the total overhead costs of each unit of output or job by using overhead rate is known as the absorption of overhead. Thus the distribution of the overhead expenses allotted to a particular department over the units of produced in that department is absorption of overheads.
In order to absorb the overheads by the units if output of a particular department, the overhead absorption rate or overhead rate should be determined. The two popular methods of absorption of overheads are labor hour rate and machine hour rate . The formula to calculate overhead rate under these methods are given below.
Labor hour rate = Total Overheads/Total Labor Hours
Machine hour rate = Total Overheads/ Total Machine Hours
Labor hour rate = Total Overheads/Total Labor Hours
Machine hour rate = Total Overheads/ Total Machine Hours