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Absorption Of Overheads-B.V.Raghunandan


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Methods of absorption of overheads in the study of Cost Accounting

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Absorption Of Overheads-B.V.Raghunandan

  1. 1. Chapter III<br />Absorption of Overheads<br />
  2. 2. Definition of Absorption<br />Absorption is, ”the process of absorbing all overhead costs allocated or apportioned over a particular cost centre or production department by the units produced “- CIMA<br />CAS 3 of ICWAI defines it as, “charging of overheads from cost centres to products or services by means of absorption rates for each cost center”<br />
  3. 3. Methods of Absorption of Overheads <br />Production Unit Method:<br /> Absorption Rate=<br />
  4. 4. 2.Percentage of Direct Material Cost Method<br />Absorption Rate = <br />
  5. 5. 3.Percentage of Direct Labour Cost Method<br />Absorption Rate=<br />
  6. 6. 4. Percentage of Prime Cost Method<br />Absorption Rate=<br />
  7. 7. 5. Labour Hour Method<br />Absorption Rate =<br />
  8. 8. 6.Machine Hour Rate Method<br />Absorption Rate=<br />
  9. 9. Advantages of Machine Hour Rate Method<br />Scientific Method<br />Measurement of Time of Actual Working<br />Measurement of Idle Time<br />Comparison of cost and efficiency of different machines<br />
  10. 10. Disadvantages<br />Additional Work<br />Additional Cost<br />Not Suitable for Labour Intensive Industry<br />Method not suitable when machine Hours can not be calculated<br />