The purpose of overhead absorption is to:

The purpose of overhead absorption is to:

• A. Charge overhead costs to the cost unit produced by the cost centre
• B. Allocate overhead only to service departments
• C. Eliminate overhead entirely
• D. Determine selling prices

Answer: (A)

Overhead absorption means charging the overhead costs to the cost units produced by the cost centre, using a systematic basis such as direct labour hours, machine hours, or another relevant cost driver. By applying an absorption rate, each product or service takes a fair share of indirect costs, so the recorded cost of a unit reflects its true consumption of resources. This supports accurate inventory valuation and informed cost control and decision making. Allocating overhead only to service departments isn’t the full aim, since absorption applies to production costs as well as service overheads that drive production cost. Eliminating overhead isn’t possible—the firm has to allocate or absorb these costs. Determining selling prices is a downstream outcome influenced by absorbed costs, but the fundamental purpose is to attach overhead to the produced cost units.

Overhead absorption means charging the overhead costs to the cost units produced by the cost centre, using a systematic basis such as direct labour hours, machine hours, or another relevant cost driver. By applying an absorption rate, each product or service takes a fair share of indirect costs, so the recorded cost of a unit reflects its true consumption of resources. This supports accurate inventory valuation and informed cost control and decision making.

Allocating overhead only to service departments isn’t the full aim, since absorption applies to production costs as well as service overheads that drive production cost. Eliminating overhead isn’t possible—the firm has to allocate or absorb these costs. Determining selling prices is a downstream outcome influenced by absorbed costs, but the fundamental purpose is to attach overhead to the produced cost units.