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Discuss the Overhead Absorption

Discuss the Overhead Absorption

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Absorption is changing of overheads to cost units. There are various methods used in this case:
N/B: Whenever possible the bases chose should reflect the benefits extracted by a cost unit

1. Percentage on client material cost
In this case budgeted production overhead cost is expressed as a percentage of direct material cost i.e.

The percentage obtained is applied to the direct material cost of each of job to get the overhead absorbed.

2. Percentage on direct labour cost
Here the budgeted overheads are expressed as a percentage of direct labour cost i.e.

The percentage is then applied to the direct cost of each job.

3. Rate per direct labour hour
In this case budgeted overheads are expressed in terms of rates per every budgeted hour i.e.



4. Rate per machine hour
This method is used where a machine is the focal point in a cost centre. The machine may be semi automated in which case the operators are machine minders whose wage cost are treated as production overheads.

The rate is the applied to the number of machine hours on the job obtain overheads absorbed.

5. Rate per unit of output
This method may be used where there is a single output unit from the cost centre or where the operations performed in the cost centre are the same per unit of output.



6. A combination of rate
A department may have work performed on it and overheads may arise as a result of a multiplicity of factors in the departments. This may necessity use of a combination of methods to ensure equitable distribution of the overheads

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Wilfykil answered the question on August 6, 2019 at 05:31

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