ABSORBED OVERHEAD Meaning and
Definition
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Absorbed overhead refers to the indirect costs or expenses incurred by a company during the production process, which are allocated and included in the overall cost of the product. These overhead costs are essential for the production and are required to ensure the smooth operation of a business, but they cannot be directly attributed to a specific product or service.
When calculating the cost of a product, a company typically takes into account both the direct costs (such as raw materials and direct labor) and the indirect costs, which include the overhead expenses. Absorbed overhead is the portion of these indirect costs that is allocated and absorbed by the products or services being produced.
The allocation of overhead costs to products is usually done based on an allocation base, such as machine hours, labor hours, or any other suitable measure. The allocation base serves as a reference to distribute the overhead costs among the products, reflecting the proportion of resources utilized by each product.
Absorbed overhead is crucial for determining the total cost of a product, which influences pricing decisions, profitability analysis, and financial reporting. By including absorbed overhead in the product cost, a company can ensure that all incurred expenses are appropriately attributed and accounted for, providing a more accurate assessment of the overall costs associated with the production process.
Etymology of ABSORBED OVERHEAD
The word "absorbed overhead" does not have a specific etymology because it is a term used in accounting and finance rather than a standalone word with its own origin. "Overhead" refers to the costs and expenses that are not directly attributable to a specific product or service, but instead support the overall operation of a business. These costs can include rent, utilities, salaries, and other administrative expenses.
The term "absorbed overhead" refers to how these overhead costs are allocated or absorbed into the cost of producing a product or service. It is a way of distributing overhead expenses among the units produced or sold by a company, so that each unit takes its share of the overhead.
In summary, "absorbed overhead" is a compound term that combines "absorbed" as a verb meaning to take in or incorporate, and "overhead" as a noun referring to indirect costs in business.
