Manufacturing overhead absorption is used to apply overhead to the total cost of a product. Overhead absorption is not the same as overhead allocation or overhead apportionment.
The equivalent units of production method is used in process costing to express partially completed units of product in terms of finished units.
The objective of using equivalent units is to be able to allocate production costs to completed and partially completed units.
In a standard costing accounting system, fixed manufacturing overhead has two main variances budget and volume. Fixed overheads are those costs which do not vary in response to the level of production output. To operate a standard costing system and allocate fixed overhead, the business must first decide on the basis of allocation, and calculate the standard fixed overhead allocation rate.
In a standard costing accounting system, variable manufacturing overhead has two main variances rate and efficiency. Variable overheads are those costs which vary in response to the level of production output but which cannot be attributed to individual units of production. To operate a standard costing system and allocate variable overhead, the business must first decide on the basis of allocation.
In a standard costing accounting system, direct labor has two main variances price and efficiency. Unlike direct materials, direct labor is used at the same time as it is purchased, and therefore the price and efficiency variances occur at the same time on the same production run, and a single journal is needed post the variances together with the standard and actual cost to the accounting system.