# Absorption of Overheads
After Primary + Secondary distribution, the total overhead is sitting in the production departments. We now need to recover (absorb) this from the units, jobs or batches produced.
## Recovery Rate (Absorption Rate)
$$\text{Recovery Rate} = \frac{\text{Total Budgeted Overheads}}{\text{Total Budgeted Base}}$$
We pick a sensible base that reflects how output drives overhead consumption.
## Six Methods of Absorption
| # | Method | Formula |
|---|---|---|
| (i) | % of Direct Materials | (Total Budgeted OH ÷ Total Direct Material) × 100 |
| (ii) | % of Prime Cost | (Total Budgeted OH ÷ Total Prime Cost) × 100 |
| (iii) | % of Direct Labour (Wages) | (Total Budgeted OH ÷ Total Direct Labour) × 100 |
| (iv) | Labour Hour Rate | Total Budgeted OH ÷ Total Labour Hours |
| (v) | Machine Hour Rate | Total Budgeted OH ÷ Total Machine Hours |
| (vi) | Rate per Unit of Output | Total Budgeted OH ÷ Total Units |
## How to Choose the Right Method
- Labour-intensive process → Labour Hour Rate or % of Direct Wages.
- Machine-intensive process → Machine Hour Rate.
- Single homogeneous product → Rate per Unit (simplest).
- Job costing where materials dominate → % of Direct Material.
- Mixed cost base → % of Prime Cost.
> Best method generally = Machine Hour Rate or Labour Hour Rate because they reflect time — and most overheads vary with time.