# Overhead Absorption Rates
## Two Dimensions of OAR
Overhead Absorption Rate (OAR) can be classified along two independent axes:
1. When calculated → AOR vs POR
2. Scope of factory covered → Blanket Rate vs Departmental Rate
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## Axis 1: Actual Overhead Rate (AOR) vs Pre-determined Overhead Rate (POR)
$$\text{AOR} = \frac{\text{Actual Overheads for the period}}{\text{Actual Base for the period}}$$
$$\text{POR} = \frac{\text{Budgeted Overheads for the period}}{\text{Budgeted Base for the period}}$$
| Feature | AOR | POR |
|---|---|---|
| Data used | Actual overheads | Budgeted overheads |
| Timing | Calculated after OH incurred | Calculated before OH incurred |
| Cost control | Does NOT facilitate cost control | Facilitates cost control (compare actual vs pre-determined OH) |
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## Axis 2: Blanket Rate (BOR) vs Departmental Rate (DOR)
$$\text{BOR} = \frac{\text{Total OH for all departments/cost centres}}{\text{Total Base for all departments/cost centres}}$$
$$\text{DOR} = \frac{\text{Total OH of a department/cost centre}}{\text{Base for that department/cost centre}}$$
| Feature | BOR | DOR |
|---|---|---|
| Scope | Single rate — entire factory | Separate rate — each department |
| Number of rates | One | Multiple |
| Suitable when | One product manufactured | Two or more products manufactured |
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## Key Takeaway
POR is preferred in practice because it enables cost control. DOR is preferred when multiple products are manufactured because BOR would distort per-product costs.