Absorption refers to the charging of overhead expenses to the ultimate cost unit. It is the process of distribution of overhead expenses over the unit produced in that department, by applying suitable overhead rates.
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Methods of absorbing manufacturing overheads:
Various methods of absorbing manufacturing overheads may be used for distribution of overheads. These may be:
- Direct material cost method.
- Direct labor cost method.
- Prime cost method.
- Labor hour rate method.
- Machine hour rate method.