Apportion overheads and calculate absorption rates
Allocate traceable overheads, apportion shared costs on a reasonable basis, reapportion service department costs, and absorb production overhead into output.
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These original lessons cover Topic 2.2.1–2.2.4: unit, job and batch costing; absorption costing and overheads; marginal costing, contribution and break-even analysis; and cost–volume–profit decisions. Practice is self-checked, not an official Cambridge grade; full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Know the difference between direct and indirect costs and between fixed and variable cost behaviour. Keep units, production volume, overhead rates and relevant ranges visible in calculations.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Budgeted factory overhead is $36,000 for 3,000 machine hours. What is the OAR?
What you will learn
- Explain cost centre and cost unit roles in overhead accounting
- Allocate, apportion and reapportion overheads using supplied bases
- Calculate and select an overhead absorption rate
Share overheads on a reasoned basis
Allocate a cost directly to the department that caused it when the amount can be identified. Apportion a shared cost across cost centres using a basis linked to its use or cause: floor area for rent, machine hours for machine power, or headcount for some staff facilities. State the basis so the calculation can be reviewed.
A service department supports production departments but does not make the final units itself. Where the question provides service-use data, reapportion its overhead to production departments on that basis before calculating production overhead rates. Do not assign a service-centre cost to units without following the question's specified method.
Absorb production overhead using an appropriate activity
An overhead absorption rate (OAR) estimates production overhead per unit of an activity: budgeted production overhead ÷ budgeted activity. Possible bases include direct labour hours, machine hours or units, chosen to reflect how overhead is incurred. Apply the rate to the actual activity for a job or batch.
A machine-intensive process may use machine hours; a labour-intensive service may use labour hours. A single rate across unlike departments can distort unit costs, so departmental rates may be more suitable. The resulting cost is an estimate for costing purposes, not a measurement of the exact overhead caused by each unit.
Pause and explain
A job uses 25 labour hours with an OAR of $8 per labour hour. How much overhead is absorbed?
Worked example
Production A uses 3,200 direct labour hours and has overhead of $9,600 after apportionment. Production B uses 2,500 machine hours and has overhead of $7,500. Calculate a suitable rate for each department and the overhead absorbed by a job using 40 A labour hours and 12 B machine hours.
Show the worked solution
- A rate = 9,600 ÷ 3,200 = $3 per labour hour; B rate = 7,500 ÷ 2,500 = $3 per machine hour.
- Job overhead from A = 40 × $3 = $120; from B = 12 × $3 = $36.
- Total overhead absorbed by the job = $156 using the two stated departmental activities.
Answer Department A rate $3 per labour hour; Department B rate $3 per machine hour; job overhead $156.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Rent of $10,000 is apportioned by floor area: Production A 500 m², Production B 300 m², and Maintenance 200 m². Reapportion Maintenance's share to A and B in the ratio 3:2, then calculate the final rent assigned to A and B.
Give me a hint
First apportion rent across all 1,000 m²; then distribute the service department's amount.
Compare my reasoning
- Initial rent allocation: A 500/1,000 × 10,000 = $5,000; B = $3,000; Maintenance = $2,000.
- Reapportion $2,000 in ratio 3:2: A receives $1,200 and B $800.
- Final rent: A $6,200; B $3,800.
Production A $6,200; Production B $3,800.
Look for these in your work
- Shared rent basis applied
- Service department amount identified
- Reapportionment totals reconcile
A department budgets overhead of $54,000 for 4,500 machine hours. A batch uses 75 machine hours and 40 direct labour hours. Calculate the machine-hour OAR and batch overhead. Explain why labour hours are not used in this calculation.
Give me a hint
Use the activity basis attached to the department's budgeted overhead.
Compare my reasoning
- OAR = $54,000 ÷ 4,500 machine hours = $12 per machine hour.
- Batch overhead = 75 × $12 = $900.
- The 40 labour hours are not the stated absorption basis, so they do not determine this department's absorbed overhead.
OAR $12 per machine hour; batch overhead $900.
Look for these in your work
- Rate denominator correct
- Machine hours applied
- Other activity not substituted
A manager uses one overhead rate for a hand-assembly line and an automated line. Suggest a way to test whether this gives useful product costs and name one limitation of a more detailed rate system.
Give me a hint
Compare the overhead causes and resource use of the two lines.
Compare my reasoning
- Collect overhead and activity data separately for each line, such as labour and machine hours.
- Compare product costs and resulting pricing or product-mix decisions under one rate and departmental rates.
- More rates may improve the causal link but require more records, estimates and staff time; the benefit depends on materiality and decision use.
Test a single rate against departmental rates using actual activity and compare how the resulting costs affect decisions. More detailed rates can improve attribution but cost more to maintain and still use estimates.
Look for these in your work
- Cost drivers tested
- Decision impact considered
- System cost acknowledged
Common mistakes
- Using an apportionment basis unrelated to the cost without explanation
- Dividing actual overhead by budgeted activity when asked for a predetermined OAR
- Applying the rate in a different unit from its stated basis
What can you explain now?
A factory's machine power bill is shared between production departments. Which basis may be more relevant if readings are available?
Compare with the explanation
Machine hours or measured machine consumption
That evidence links the allocation to use of machine power.
After trying it yourself, choose your next review. This is your self-assessment.
Your review choice appears on Today. Sign in to sync it across devices.
Make it stick
State the formula for an overhead absorption rate and give one suitable basis for a production department.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.