Absorption rate is the rate used to allocate factory overheads to products or jobs.

It helps businesses distribute indirect costs fairly during production.

It is usually calculated as:

Absorption Rate = Estimated Overheads ÷ Estimated Activity Level

The activity level may be:

Labour hours

Machine hours

Units produced

Example:
If estimated overhead is ₹1,00,000 and estimated labour hours are 10,000 hours,
Absorption rate = ₹10 per labour hour.

In simple terms, absorption rate is the amount of overhead cost charged per unit of activity.