Absorption of overhead

This study material is useful to students of Cost and works Accounting Subject

1. Absorption of Overhead Dr Sucheta Dalvi Assit.Prof , Tikaram Jagannath College Khadki,Pune . e.mail - [email protected]

2. Steps in Accounting of Overhead Product

3. Absorption of Overhead According to ICMA,London “It is the allotment of overhead cost to cost units” Ultimate Product /cost unit Overhead

4. Methods of Overhead Absorption

5. Production Unit Method Production unit rate= factory overhead ------------------------------------------ No of units Produced Eg . Overhead=1000 No of units produced=200 Cost unit rate = 1000/200 = Rs 5 p. u

6. Percentage Method

7. Percentage of Direct Material Cost the actual and predetermined overhead rate of production overhead is computed by dividing the production overhead by the direct material cost and multiplying by 100 Suitability-   1. When only one kind of article is produced 2. When prices of material are stable. 3. When same quantity of material is used for all units. 4. When material cost forms a greater part of the cost of production  

8. Percentage of Direct Labour Cost the actual and predetermined overhead rate of production overhead is computed by dividing the production overhead by the direct wages cost and multiplying by 100 Suitability-   1. When production is uniform. 2. When labour cost is predominant part in the cost of production. 3. When there is no variation in the wage rate. 4. When the ratio of skilled and unskilled labour is constant.  

9. Percentage of Prime Cost This method is a combination of direct material method and direct wages method. The actual and predetermined overhead rate of production overhead is computed by dividing the production overhead by the prime cost and multiplying by 100  

10. Hourly Rate Method

11. Direct labour hour Rate . In this method overhead absorption rate is computed by dividing the production overheads by the direct labour hours. Suitability   1. It is suitable when most of the work is done manually 2. It is suitable when the production is not uniform. 3. It is suitable when the percentage method fails to give accurate result.  

12. Machine hour Rate and Duel hour Rate The cost of running a machine per hour can be called the machine hour rate. The actual or predetermined overhead rate is computed by dividing production overhead cost by the machine hours Duel hour Rate – A combination of labour hour rate and machine hour rate is known as duel hour rate.  

13. Overhead Absorption Rate

14. Blanket Rate Single overhead Rate for Entire Factory

15. Multiple Overhead Rate Different overhead rate for different division and dept.

16. Thank you