Calculate Overhead Absorption Rate Based on Labor Hour

How is the overhead absorption rate calculated?

What is the primary and secondary allocation process for overhead costs based on the given data?

To prepare an overhead allocation statement and calculate the overhead absorption rate based on labor hours, we'll follow the given information and allocate the overhead costs to the departments.

The overhead absorption rate is calculated by dividing the total allocated overheads by the total labor hours. In this case, the calculated overhead absorption rate is R16.36 per labor hour.

The overhead absorption rate is an important metric used by businesses to allocate their overhead costs to production units. By determining the absorption rate based on labor hours, companies can accurately assign overhead costs to products or departments. The overhead allocation process involves primary and secondary allocations. Primary allocation distributes costs based on specific factors such as floor area, machine book value, number of employees, and kilowatt hours. Secondary allocation assigns costs to specific departments based on factors like direct material, direct labor, machine hours, and labor hours. In this case, the overhead absorption rate is calculated by dividing the total allocated overheads by the total labor hours. The formula for calculating the overhead absorption rate is: Overhead Absorption Rate = Total Overheads / Total Labor Hours By applying this formula to the given data, the calculated overhead absorption rate is R16.36 per labor hour. This means that for every labor hour worked, R16.36 of overhead costs are allocated to the production units. Understanding the overhead absorption rate is essential for businesses to make informed decisions about cost allocation and pricing strategies. By accurately calculating and applying the absorption rate, companies can improve their cost management practices and optimize their production processes.