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recovery ratea means of charging OVERHEADS to products. By relating budgeted overhead costs to budgeted output, it is possible to calculate an overhead absorption rate per unit of product to add to the standard DIRECT COST (direct materials cost and direct labour cost) of a product in order to determine its production cost. Alternatively production overheads can be charged as a percentage on the direct labour cost of a product; or a percentage on the direct materials cost of the product; or on the basis of the direct labour hours to make the product (at a rate per direct labour hour); or on the basis of the machine hours needed to make the product (at a rate per machine hour).
Once the production cost of a product has been determined by adding production overheads, then a further addition must be made to cover selling, distribution and administration overheads. These can be allowed for by means of other cost rates, such as by adding an appropriate percentage to the production cost of the product. The addition of overhead cost rates to the standard direct cost of products serves to establish their total cost, and facilitates their ABSORPTION through selling prices. See BUDGET, STANDARD COST.
The rate at which vacant space is leased or purchased over a specified period of time. The absorption rate for commercial property is usually expressed in square feet per year; residential property is quoted in units (homes) per year.