What's the difference between allocation and apportionment?

Allocation assigns a whole cost directly to a specific cost centre, whereas apportionment is a method of sharing a common cost between multiple cost centres on a fair basis.

Why do we need to calculate an OAR?

You need an OAR to include a fair share of indirect production costs in the total cost of a product, which is essential for inventory valuation, pricing decisions, and profitability analysis.

How do I choose the best absorption basis (e.g., labour vs machine hours)?

Choose the basis that is the main driver of the overheads. If your production process is machine-intensive, use machine hours; if it is labour-intensive, use labour hours.

What if I use the wrong basis in the exam?

If the question provides a clear basis, you must use it. If it is ambiguous, state your assumption and justify your choice; you will likely still get marks for applying the method correctly.

How many hours should I spend on this topic?

Aim for 2-3 hours of focused practice. Spend one hour understanding the steps and 1-2 hours practicing 3-4 short questions to solidify your understanding of the process.

Am I ready to move on from this topic?

You're ready when you can consistently complete the full OAR calculation for a two-department problem without looking at your notes. It doesn't need to be fast, just accurate.

What is under or over-absorption?

It is the difference between the overheads you actually incurred and the overheads you absorbed into production using the OAR. This happens because the OAR is based on budgeted figures which often differ from actual results.

MA Management Accounting

Overhead Absorption Rates: A Clear Guide

Learn how to calculate and apply overhead absorption rates (OAR) for the ACCA Management Accounting exam. A step-by-step guide with examples.