1. Overhead absorption

2. 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)

3. Overhead Absorption
Also Called
Overhead Application
Overhead Recovery
Overhead Levy

4. OVERHEAD ABSORPTION RATE
Actual rate Blanket Rate
Pre-determined Rate Multiple Rate

5. 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

6. 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

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

8. OVERHEAD ABSORPTION RATE
Multiple/plant wise Each Unit/Division
Absorption Rate Has Separate Rate

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

10. 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

11. Methods Of Overhead Absorption
% Methods
% Direct Materials OHAR= POHEs For the Period
Cost of Direct Materials
Where materials Cost is a major Component

12. 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

13. 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

14. Methods Of Overhead Absorption
Hourly Rates
DL Hour Rate
OHAR= POHEs for the periodHours
No.Of Direct Labour
Useful in Labour intensive industry
Not suitable in mechanized environment
Needs lot of record keeping

15. 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

16. 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

17. 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

18. Over Absorption
Under Absorption

19. 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

20. 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

21. 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

22. ATTENTION COMMERCE
STUDENTS
ACCOUNTING (FINANCIAL & COST) OF
ICMAP STAGE 1,2,3,4
CA..MODULE B,C,D
PIPFA (FOUNDATION,INTERMEDIATE,FINAL)
BBA,MBA
B.COM,M.COM
MA-ECONOMICS—STATISTICS
O/A LEVEL
KHALID AZIZ
0322-3385752
COST-ACCOUNTANTS@YAHOOGROUPS.COM