Blanket Absorption Rate and Departmental Absorption Rate
Blanket Absorption Rate
Blanket absorption rate is used in relation to the recovery or absorption of overheads.
For ease and simplicity, a common absorption rate for overheads may be used across a factory for all jobs and units of production, irrespective of the department in which they were produced. This is known as the blanket absorption rate.
A common absorption rate is not appropriate when a factory has many departments, or when the jobs or units of production do not spend an equal amount of time in each department.
Such a rate should also be avoided if all the jobs or units do not pass through all the departments in the factory.
Rather than using the blanket absorption rate, the departmental overhead rate of the respective departments (calculated using the amount of overhead assigned to departments) is applied to the jobs or units of production based on the time spent in each department.
Departmental Absorption Rate
When the overhead absorption rate is calculated separately for each department in a factory, this is known as the departmental absorption rate.
It is advisable to establish separate overhead rates for each department to ensure that all jobs and units of production are charged with their fair share of overheads. This is suitable when jobs and units do not spend a similar amount of time in each department.
ABC Ltd. manufactures engineering components. The following budgeted information is given for 2019-20:
Required: Calculate the blanket and departmental overhead absorption rates and the overhead to be charged to Job X under both methods.
Calculation of Blanket Overhead Absorption Rate
Overhead Rate = Total Overhead / Total Machine Hours
= $5,50,000 / 40,000 machine hours
Calculation of overhead to be charged to Job X (based on the departmental overhead rate)
Calculation of overhead to be charged to Job X (based on the blanket overhead rate)
Total machine hours to be used on Job X = 40 + 50 + 30 + 20 = 140 machine hours
Blanket overhead rate = $13.75
Overhead to be charged to Job X = 140 machine hours x $13.75
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.