Production overheads are recovered by absorbing them into the cost of a product and this process is called absorption costing. 

It is an method of costing in which the costs of an item are built up as the sum of direct costs and a fair share of overhead costs, to obtain a full cost or a fully absorbed cost

Focusing on production overheads, we canlook at how the overheads can be 'shared out' to the individual cost units.

Production overhead costs arise from:

Production department (e.g. cost of fuel, protecting clothing etc.)

Service department (e.g. material handling costs, production control cost, canteen cost)

General costs (e.g. heating and lighting, factory rent)

Step 1: Allocationand apportionment of production overhead to production and service cost centres

Step 2: Reapportionment of overhead collected in service cost centres(from step 1) to production cost centres

Step 3: Absorption of overheads from production cost centres intocost units using a predetermined overhead absorption rate (OAR)