3,000 and the material cost is 10,000 then the absorption rate will be (3000/10000)x 100 = 30% Now for a product if the material cost is 1000 then the overhead cost is 300. so the total cost would be 1300. The classic example of and industry using this type of absorption are gold jewelers the typical absorption rate varies from 2-5% of the cost of the gold. If the cost of the material fluctuates this method cannot be used. For this type of absorption the material cost should be stable. If in the same industry material of different cost is used the calculation becomes unjustified, especially when the cost of the material differ too much. Direct labour cost percentage rate In this method cost is absorbed as a percent of the labour cost or the wages. (Overhead cost/Labour cost)x 100 If the Labour cost is 5000 and the overhead cost is 1000 then the absorption cost is 20%. If the labour cost of one job is 500 it will have to absorb 20% i.e. 100 as the overhead cost making the total cost to be 600. This method can be used in service industry where the major input is the skilled or unskilled labour. For the proper calculation labour rates need to be constant and the skill and efficiency of the labourer need to be identical. Prime cost percentage rate In this method both material cost as well as labour cost is the base for calculating the overhead absorption. It is calculated as (Overhead Cost/Prime cost)x 100. Prime cost is nothing but the sum of direct material cost and direct labour cost. Labour Hour rate This method is mostly used if the industry is labour-intensive and the labour is mostly unskilled or semiskilled. It is calculated as (overhead cost/ Labour hours required for production) if the labour hour required is 1000 and the overhead to be absorbed is 250 then the rate is .25 per labour hour. if 20 labour hours are required to complete a job then the overhead will be 5. Machine hour rate If the industry considered has a high degree of automation and mechanization then this method can be used. Here the major chunk of the cost comes from the utilization of the machines. it is calculated as (overhead cost/ number of machine hours) This is very useful if the running cost of the machines including