Overhead absorption

Overhead Absorption

It is a systematic process of distributing the

OH, (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 Blanket Rate

Pre-determined Rate Multiple Rate

 OVERHEAD ABSORPTION RATE

Actual rate Actual OHEs for the period

Actual No. of the units of base

Can be computed Annually, Quarterly, Monthly

Unit OHE rate may be High in slack period
Low in Busy Season
OHE Absorption rate differs from period to period
 OVERHEAD ABSORPTION RATE

Pre-determined Budgeted OHEs for the Period

Budgeted No. Of Units of Base
Rate

Remains constant in a particular period

Facilitate quick estimation/cost sheet

But creates under/absorption of overheads

 OVERHEAD ABSORPTION RATE

Single
Or Only one Rate for entire
Blanket Unit/plant Department
 OVERHEAD ABSORPTION RATE

Multiple/plant wise Each Unit/Division

Absorption Rate Has Separate Rate
 Methods Of Overhead Absorption

% Methods Hourly Rate

Methods
Production Unit
Method
% Direct Materials DL Hour Rate
Method % Direct Wages Machine Hour
% Prime Cost Rate
 Methods Of Overhead Absorption

Production Unit OHAR= POHEs for the period

Method No.Of Units Of Output
Method

Suitable when only one product is produced

or

Similar type of products are produced

 Methods Of Overhead Absorption

% Methods

% Direct Materials OHAR= POHEs For the Period

Cost of Direct Materials

Where materials Cost is a major Component

 Methods Of Overhead Absorption

% Methods

% Direct Wages
OHAR= POHEs For the Period
Direct Wages

Popular in Labour intensive industry

Not suitable where labour paid according to piece rate

 Methods Of Overhead Absorption

% Methods

% Prime Cost
OHAR= POHEs For the Period
Prime Cost

Ensures Advantages of previous two methods

Suffers from their limitations too

 Methods Of Overhead Absorption

Hourly Rates

DL Hour Rate
OHAR= POHEs for the period
No.Of Direct Labour Hours

Useful in Labour intensive industry

Not suitable in mechanized environment

Needs lot of record keeping

 Methods Of Overhead Absorption

Hourly Rates

POHEs for the period

Machine Hour OHAR= No.Of Machine Hours
Rate

Most Popular Method

Can be fixed for a Machine or Group Of Machines

 Computing Machine Hour Rate

Machine Running Expenses Standing Expenses

Or Or
Variable Expenses Fixed Expenses

Cost Of
Cost of Rent & Rates
Lighting &
Power Heating
Steam Supervision
Oil Insurance
Repairs Cotton Waste
Maintenance Indirect Labour
Depreciation Consumable Stores
Lubricants
 Methods Of Overhead Absorption

Common Costs to be apportioned

Both Fixed/variable costs be divided by Machine Hrs

Hourly Rates
Machine Hr represents Cost of Operating Machine
for One Hour
Machine Hour
Rate 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’s

OH Ab Rate Actual Value of Base

Positive Supplementary = Under Absorbed POHE’S

OH 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