Overhead Absorption Calculator
Overhead absorption is how cost accountants assign indirect production costs to products using a predetermined rate. The rate comes from budgeted overhead divided by a budgeted activity base, such as machine hours or labor hours. Applying that rate to actual activity gives the overhead absorbed by output, and comparing it to actual overhead reveals over or under absorption. This calculator computes the absorption rate, the applied overhead, and the absorption variance from your budgeted overhead, budgeted base, actual activity, and actual overhead. All money figures are in US dollars.
Overhead absorption formula
Absorption rate = budgeted overhead / budgeted activity base
Applied overhead = absorption rate * actual activity
Absorption variance = applied overhead - actual overhead
Positive variance = over absorbed; negative = under absorbed
The predetermined rate is fixed from the budget. Applying it to actual activity gives the overhead charged to output. The variance against actual overhead is over absorbed when positive and under absorbed when negative.
Using the absorption rate
- Set the rate before the period using budgeted figures so products can be costed as they are made.
- Pick an activity base that drives overhead: machine hours for automated lines, labor hours for manual work.
- Over absorption means products were charged more overhead than was actually incurred.
- The absorption variance is typically written off to cost of goods sold at period end.
- Enter your own budget and actuals; the tool makes no assumption about your cost structure.
Overhead absorption: frequently asked questions
What is overhead absorption?
Overhead absorption, also called overhead application, is the process of charging indirect production costs to units of output using a predetermined rate. The rate is set from budgeted overhead and a budgeted activity base such as labor hours or machine hours, then applied to actual activity to assign overhead to products.
How is the overhead absorption rate calculated?
The predetermined overhead absorption rate equals budgeted overhead divided by the budgeted activity base. If budgeted overhead is US$200,000 and budgeted machine hours are 50,000, the rate is US$4.00 per machine hour. Multiply the rate by actual hours to get applied overhead.
What is over or under absorption?
Over absorption occurs when applied overhead exceeds actual overhead, meaning too much was charged to products. Under absorption occurs when applied overhead is less than actual overhead. The difference is a variance that is written off to the cost of goods sold or apportioned at period end.
Which activity base should I use?
Choose the base that best drives overhead cost: direct labor hours for labor-intensive work, machine hours for automated production, or units for uniform products. The base should have a strong cause-and-effect relationship with the overhead being absorbed, so applied costs are fair.
Why use a predetermined rate instead of actual overhead?
Actual overhead is not known until the period closes, but products must be costed throughout the period for pricing and inventory valuation. A predetermined rate, set from the budget, lets overhead be applied as production happens. Any variance is reconciled at period end.
Official sources
- U.S. Securities and Exchange Commission, financial reporting: sec.gov.
- U.S. Small Business Administration, accounting basics: sba.gov.
Reviewed by the CalculatorHub team, edited by James Graham, 17 June 2026. See our methodology.