This example below demonstrates that 70.31% of the overheads are covered by Aftersales, which leaves a shortfall to be recovered by the Sales Department.
Whenever you are measuring the Absorption of your business you should be aware that there are two very different calculations. Basically, the difference between the two calculations lies within the Semi-Fixed expenses of the Sales department: some statistics include these expenses whilst others exclude them. this of course makes a considerable difference to the Absorption figure. This version of Absorption is the most accurate, you will understand why when you read version 2.
Example:
A) Direct Profit from Aftersales = R1,154,223 B) Company Overheads = R1,452,238 C) Sales semi-Fixed Expenses = R189,364 D) Total Company Overheads = R1,641,602 (B + C) E) Overhead Absorption = 70.31% (A ÷ D X 100) F) Value of under Absorption = R487,379 (D - A)
Discussion:
The Absorption percentage of a business essentially measures risk. How much of the company's overheads are covered by the profits generated by the Aftersales Departments?