Overhead Absorption Rate Base Advantages / Disadvantages

Direct Labour Hours

Advantages:

- Good to use if production is labour intensive
- Not linked with changes in wage rates and so will remain accurate if rates change

Disadvantage:

- Difficult to keep consistent if there are different classes of labour employed

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Machine hours

Advantages:

- Good to use this if production is capital intensive
- Increasingly more suitable as automation leads to more capital intensive production processes

Disadvantage:

- Different classes of machinery require different calculations to be made

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% Direct Labour Cost

Advantages:

- More stable in terms of fluctuations in cost than when using material cost
- Useful where there are similar goods produced by uniformly paid labour

Disadvantage:

- No distinction is made between fast and slow workers: may lead to inaccuracies

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% Direct Materials

Advantage:

- Simple to calculate

Disadvantages:

- May be misleading as there is no direct relationship between overheads & materials
- Does not take into account the time required for production
- Only useful to use if the material cost is uniform

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% Prime Cost

Advantage:

- Simple, quick & convenient to calculate

Disadvantage:

- Not very accurate: number of variables used in calculation may cause innaccuracies

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Production unit

Advantage:

- Simple and quick to calculate

Disadvantage:

- Only suitable to use when there is one standard task

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