Work out overhead recovery rate instantly with clear inputs, formula shown and shareable results.
The overhead absorption rate is budgeted overhead divided by the budgeted base — labour hours, machine hours or direct cost. Applying it to the actual base gives overhead absorbed; the difference from overhead actually incurred is the over- or under-absorption that must be written off or carried in the accounts.
Absorption rate
Rate = budgeted overhead / budgeted base
Variance
Absorbed = rate x actual base; variance = absorbed - actual overhead
Either overhead spending above budget or activity below budget. Splitting the variance into expenditure and volume components tells you which, and they have very different remedies.
Machine hours where processes are capital-intensive, labour hours where they are labour-intensive. Using an unrelated base such as material cost distorts product costs badly.