Meaning & use
overhead absorption rate
Last updated
Meaning
nouncountablebusinesstechnical
The amount of indirect cost, such as rent or utilities, that a business adds to each unit of activity, such as a labor hour, to price its products.
Grammar: Often written with a measure: a rate of $8 per machine hour.
Patterns
- overhead absorption rate per something
- the overhead absorption rate for something
The overhead absorption rate was set at $12 per direct labor hour for the coming year.
If the overhead absorption rate is too low, the firm may sell goods at a loss without noticing.
The accountant recalculated the overhead absorption rate after the factory expanded.
Word forms
| plural | overhead absorption rates |
|---|
Common combinations
- calculate the overhead absorption rate
- Students must calculate the overhead absorption rate from the budget.
- predetermined overhead absorption rate
- A predetermined overhead absorption rate is set before the year starts.
- machine-hour overhead absorption rate
- The workshop uses a machine-hour overhead absorption rate.
- set the overhead absorption rate
- The finance team will set the overhead absorption rate each January.
- under-absorbed overheads
- A low rate leads to under-absorbed overheads at year end.
Synonyms and how they differ
- overhead rate
- Overhead rate is a shorter, looser label, while overhead absorption rate names the precise step of charging overhead to products.
- burden rate
- Burden rate is the American manufacturing term for much the same idea, though overhead absorption rate is the usual British exam wording.
- application rate
- Application rate is a variant used in some textbooks, while overhead absorption rate is more widely recognized.
Word family
- overhead noun
- a running cost not tied to a single product
- absorption noun
- the process of taking in, here charging costs to products
- absorb verb
- to take in, or here to charge a cost to output
- absorption costing noun
- a method of including overheads in product costs
Commonly confused: overhead absorption rate or overhead rate of return?
overhead absorption rate vs overhead rate of return
This is not a standard term; do not mix the cost-charging rate with a rate of return, which measures profit.
Practice
A factory budgets $60,000 of overheads and 5,000 machine hours. Its overhead absorption rate per machine hour is:
Choose one answer.
Divide budgeted overheads by budgeted hours: 60,000 / 5,000 = $12. The other figures do not come from that division.
Make it your own
Write a sentence using “overhead absorption rate”, then check it and compare it with the examples above.