Overhead absorption

Overhead Absorption

It is a systematic process of distributing theOH, (allocated, apportioned and reapportioned)to production department) among the units produced by them (by production department)

Overhead Absorption

Also Called

Overhead Application

Overhead Recovery

Overhead Levy

OVERHEAD ABSORPTION RATE

Actual rate

Pre-determined Rate

Blanket Rate

Multiple Rate

OVERHEAD ABSORPTION RATE

Actual rate Actual OHEs for the periodActual No. of the units of base

Can be computed Annually, Quarterly, MonthlyUnit OHE rate may be High in slack periodLow in Busy SeasonOHE Absorption rate differs from period to period

OVERHEAD ABSORPTION RATE

Pre-determinedRate

Budgeted OHEs for the PeriodBudgeted No. Of Units of Base

Remains constant in a particular period

Facilitate quick estimation/cost sheet

But creates under/absorption of overheads

OVERHEAD ABSORPTION RATE

SingleOrBlanket

Only one Rate for entireUnit/plant Department

OVERHEAD ABSORPTION RATE

Each Unit/DivisionHas Separate Rate

Multiple/plant wiseAbsorption Rate

Production UnitMethodMethod

Methods Of Overhead Absorption

% Direct Materials% Direct Wages% Prime Cost

DL Hour RateMachine HourRate

% Methods Hourly RateMethods

Production UnitMethodMethod

Methods Of Overhead Absorption

OHAR= POHEs for the periodNo.Of Units Of Output

Suitable when only one product is produced or

Similar type of products are produced

Methods Of Overhead Absorption

% Direct Materials

% Methods

OHAR= POHEs For the PeriodCost of Direct Materials

Where materials Cost is a major Component

Methods Of Overhead Absorption

% Direct Wages

% Methods

OHAR= POHEs For the PeriodDirect Wages

Popular in Labour intensive industry

Not suitable where labour paid according to piece rate

Methods Of Overhead Absorption

% Prime Cost

% Methods

OHAR= POHEs For the Period Prime Cost

Ensures Advantages of previous two methods

Suffers from their limitations too

Methods Of Overhead Absorption

DL Hour Rate

Hourly Rates

OHAR=POHEs for the periodNo.Of Direct Labour Hours

Useful in Labour intensive industry

Not suitable in mechanized environment

Needs lot of record keeping

Methods Of Overhead Absorption

Machine Hour Rate

Hourly Rates

OHAR=POHEs for the periodNo.Of Machine Hours

Most Popular Method

Can be fixed for a Machine or Group Of Machines

Computing Machine Hour RateComputing Machine Hour Rate

Cost of

PowerSteamOilRepairsMaintenanceDepreciation

Cost OfRent & RatesLighting &HeatingSupervisionInsuranceCotton WasteIndirect LabourConsumable StoresLubricants

Machine Running ExpensesOr

Variable Expenses

Standing ExpensesOr

Fixed Expenses

Methods Of Overhead Absorption

Machine Hour Rate

Hourly Rates

Common Costs to be apportioned

Both Fixed/variable costs be divided by Machine Hrs

Machine Hr represents Cost of Operating Machine for One Hour

Time spent on cleaning, warming may be excluded from Machine hours

Time spent on Normal Setting Up may be included

Cost of reserve machine ( Motor ) may be considered

Over Absorption

Under Absorption

Over Absorption

Under Absorption

Actual OH Absorption rate. No UA or OA

Predetermined OH Abs. Rate may get UA/OA

UA, If OHE’s charged to product were less

OA, If OHE’s Charged to product were more

Over Absorption

Under Absorption Treatment

a) IF ABOUNT IS SIGNIFICANT

Negative Supplementary = Over absorbed POHE’sOH Ab Rate Actual Value of Base

Positive Supplementary = Under Absorbed POHE’SOH Ab Rate Actual Value Of Base

Over Absorption

Under Absorption Treatment

b) Writing Off to Costing P/L A/C

Amount is not Significant

Significant but happened due to abnormal reasons

c) Carry forward to next period account for Absorption

ATTENTION COMMERCE STUDENTS

ACCOUNTING (FINANCIAL & COST) OFICMAP STAGE 1,2,3,4CA..MODULE B,C,DPIPFA (FOUNDATION,INTERMEDIATE,FINAL)BBA,MBAB.COM,M.COMMA-ECONOMICS—STATISTICSO/A LEVELKHALID AZIZ0322-3385752COST-ACCOUNTANTS@YAHOOGROUPS.COM