It stands for overheads absorption rate; a pre-determined rate that is set for the purpose of defining the absorption of production overheads into the cost of a product. Overheads consist of indirect materials, indirect labor costs and indirect expenses which are not directly identifiable or cannot be allocated to a cost object in a systematic manner or an economically feasible way. The absorption of overheads into the cost of a product can be based on multiple methods including: production volume (units), labor hours (for labor intensive production), machine hours (for capital intensive production), percentage of direct material cost, percentage of direct labor cost, percentage of prime cost.

Overheads are classified on the basis of functions (cost centers) to which the overheads relate such as production overheads, administrative overheads, selling overheads, distribution overheads, etc. Overheads may also be classified on the basis of behavior (degree of variability) such as variable overheads, semi-variable overheads and fixed overheads.

OAR may also denote overall capitalization rate.