What is Absorption Rate
The absorption rate is rate used to charged the overheads to the production . The rate is based on the budgeted level of activity and budgeted overheads. The absorption rate is calculated by dividing the budgeted overheads by the budgeted level of activity.
What is use of Absorption Rate
Absorption rate is basically used to overhead during the year and based on historical data ( i.e budgeted overhead and budged location). The data of the actual overheads are available at the year end therefore predetermined rate is used.
What is under absorption and over absorption
The under absorption is the less amount charged to production than actual amount . The overhead absorption is the more amount charged to the production than actual amount.
The reason for the under absorption and over absorption is due to use absorption rate for charging the overhead to the production and which may differ from actual overheads.
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