Hi all, I've been pondering over the following question but still haven't found an acceptable answer. So, my question is, how do you determine the exact method of overhead absorption to use? I work in a manufacturing environment and so there are several approaches that can be used. In particular, I am trying to establish a mathematically sound approach to comparing different methods of overhead absorption. Any advice or comments will be appreciated Thank you in advance, Alan

So, my question is, how do you determine the exact method of overhead 1. Use an absorption rate. 2. Compare absorbed costs to actual costs. 3. Refine your rate. 4. Constantly repeat

You have two choices. 1. Use the classic approach of using labor hours and/or machine hours to allocate costs. 2. Use activity based costing principles. Watch and study the processes. Try to be innovative in determining exactly what activities drive costs. Think outside the box of just labor and machine hours. Look at things like the number and amount of time of line setups and breakdowns. Look at and consider all the activities involved in making the product. Can you tell us more about the product and the process?

Well dear you have to calculate your full years approx. fixed expenses and divide them on your capacity level (no. of products produced in last year) or no. of jobs done . even you can make its rate as well. at the end of year you can easily compare your "charged overheads to production" with Actual overheads and from this comparison you make overheads rate for next year . You can get more better Answers if you provide a bit more details of business process and products.