A car mechanic service has overheads of 20,000 per month. Each month 1,500 direct labour hours are worked servicing cars. One repair took 5 hours to complete and used spare parts costing 125. Wages are paid at 18 per hour. Assuming that overheads are recovered on a direct labour hour basis the absorption cost of the repair would be:

Overhead recovery rate= 20,000/1,500hrs or 13.33 per hour.

Absorption cost:

Illustration A car mechanic service has overheads of 20,000 per month. Each month 1,500 direct labour hours are worked servicing cars. One repair took 5 hours to complete and used spare parts costing f125. Wages are paid at 18 per hour. Assuming that overheads are recovered on a direct labour hour basis the absorption cost of the repair would be: - Overhead recovery rate =20,000/1,500 hrs or 13.33 per hour. - Absorption cost