BEHIND THE NUMBERS
How this calculation works
Predetermined rate = budgeted overhead ÷ budgeted activity. Absorbed overhead = rate × actual activity. Over-absorption = absorbed − actual overhead; a negative result is under-absorption. Job allowance = rate × job activity. A direct-labour-cost rate is displayed as a percentage.
Worked example
£10,000 over 1,000 hours gives £10/hour. Actual 1,200 hours absorb £12,000, £1,000 above actual expenditure. A 50-hour job receives £500 overhead.
Example result: £10.00
Set the rate before measuring recovery
Using actual overhead divided by actual activity would erase the recovery variance. A predetermined rate preserves the comparison with the budget.
Interpret the sign
Over-absorption means the costing system charged more overhead than was spent; under-absorption means it charged less. Neither is cash profit on its own.
Assumptions and rounding
- The same activity measure is used in every activity field.
- The chosen base is suitable for the overhead pool.
Questions about this calculator
Can I use direct labour cost?
Yes. Enter pounds in all three activity fields. The rate is then expressed as a percentage of direct labour cost.
Should I mix machine and labour hours?
No. Use one activity base for a pool, or calculate the pools separately.