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CA Intermediate · Cost and Management Accounting · Overheads - Absorption Costing Method

Which one of the following is the correct description of 'overhead absorption' in cost accounting?

Overhead absorption means charging overheads to products or cost units using a predetermined rate based on a suitable base such as machine hours or labour hours. It differs from allocation, apportionment and reapportionment, which only assign costs to departments before absorption into units takes place.

  1. ACharging overheads to cost units or cost centres using a predetermined rateCorrect
  2. BAllocating whole items of overhead cost directly to a single cost centre
  3. CSpreading the cost of service departments over production departments
  4. DCollecting overhead expenses from the books of account by nature

Explanation

Absorption is the process of charging overheads to cost units, usually through a predetermined rate based on a chosen base such as labour hours or machine hours. Allocation assigns whole items to a cost centre, and reapportionment shares service department costs with production departments. Collecting expenses by nature is classification, not absorption.

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