Revised OAR- Sandy please help

ryannnnnnnnnnnnn Registered Posts: 13 Regular contributor ⭐ ? ⭐

Can someone please remind me of how to work out the revised OAR and give a example.

Thanks in advance


  • sammyd22
    sammyd22 Registered Posts: 207 ? ? ?
    by OAR i presume you mean "Overhead absorption Rate"! This is usually based on labour hours or machine hours but it should state in the question.

    you take your "standard Fixed OH total cost" and divide it by your "standard Machine or labour Hrs".

    Example.. Fixed cost £100,000 - Labour Hrs 5000 Hrs

    OAR = (100,000/5000 = ) £20 per Hr (Abs Rate )

    when you multiply £20 OAR by your Actual Hrs, then subtract your Actual Fixed OH Total cost you will arrive at your Under/Over absorption of fixed OH.

    Is this what you are asking? apologies if not!

  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034
    Thanks Sammy
    My overheads blog has an example of overhead rates being calculated

    If you look at the department totals in the way sammy described:
    Moulding £16,800
    Glazing £21,600

    And then consider that you would like to know the overhead absorption rates if
    1. Moulding was absorbed based on machine hours (let's assume that we budget for 2,800 hrs)
    2. Glazing was based on labour hours (assume 3,000 hrs)

    This will give us overhead absorption rates of:
    Moulding £6.00 per machine hour
    Glazing £7.20 per labour hour
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  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034
    Typically this sort of question is followed by a memo asking whether one method is better than the other.

    The question is testing that you understand knowledge and understanding criterion 10 Arbitrary nature of overhead apportionments

    Hopefully, you will show that changing the basis of the rate does not necessarily mean you have a better rate.

    I would stick to the premis that a labour intensive departrment should absorb using labour hours and a capital intensive department should use machine hours.

    If the department is consistently over or under absorbing overheads it is not likely that the choice of labour or machine hours would solve it.
    The solution may well be better budgeting of costs and hours, or even a more accurate posting of actual costs!!
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