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An explanation of the overhead absorption process, why it is necessary, and why different methods can give different product costs Because they are common to many products, a means of sharing costs between products (absorbing) is needed This is so that the full manufacturing costs of products can be found for stock valuation, pricing and decision-making. This can be carried out using a single average rate per hour (labour or machine hour) for the whole factory (Plantwide rate) but this is inaccurate as it does not take account of the different uses which products make of the factory's resources when it goes through different departments. To obtain more accurate product costs, the traditional method was to calculate departmental rates, which take account of the different costs in different departments. Because some departments are labour-intensive and some are machine-intensive, this approach allows the use of a labour hour rate or machine hour rate as appropriate. By...

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