Foh -absorption
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Transcript of Foh -absorption
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 [email protected]
