=Budgeted overhead/Budgeted activity level
(Activity level refers to production activity, not sales.)
=Actual activity (eg labour hours)×predetermined OAR
Pre-determined OAR=Budgeted overhead/Budgeted activity level
Formula
Overhead absorbed=Actual activity (eg labour hours)×predetermined OAR
Overhead absorbed ≠Actual overhead
·Actual expenditure was more or less than budget (expenditure variance).
·Actual units produced (ie volume) were more or less than budget(volume variance).
Note that the statement of profit or loss will show the actual overhead for the year