Foh -absorption

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Foh -absorption

  1. 1. Overhead absorption
  2. 2. Overhead AbsorptionIt is a systematic process of distributing theOH, (allocated, apportioned and reapportioned)to production department) among the unitsproduced by them (by production department)
  3. 3. Overhead Absorption Also Called Overhead Application Overhead Recovery Overhead Levy
  4. 4. OVERHEAD ABSORPTION RATEActual rate Blanket RatePre-determined Rate Multiple Rate
  5. 5. OVERHEAD ABSORPTION RATEActual 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. 6. OVERHEAD ABSORPTION RATEPre-determined Budgeted OHEs for the Period Budgeted No. Of Units of BaseRateRemains constant in a particular periodFacilitate quick estimation/cost sheetBut creates under/absorption of overheads
  7. 7. OVERHEAD ABSORPTION RATESingleOr Only one Rate for entireBlanket Unit/plant Department
  8. 8. OVERHEAD ABSORPTION RATEMultiple/plant wise Each Unit/DivisionAbsorption Rate Has Separate Rate
  9. 9. Methods Of Overhead Absorption % Methods Hourly Rate MethodsProduction Unit Method % Direct Materials DL Hour RateMethod % Direct Wages Machine Hour % Prime Cost Rate
  10. 10. Methods Of Overhead AbsorptionProduction Unit OHAR= POHEs for the period Method No.Of Units Of OutputMethod Suitable when only one product is produced or Similar type of products are produced
  11. 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. 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. 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. 14. Methods Of Overhead AbsorptionHourly RatesDL 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. 15. Methods Of Overhead AbsorptionHourly Rates POHEs for the periodMachine Hour OHAR= No.Of Machine Hours Rate Most Popular Method Can be fixed for a Machine or Group Of Machines
  16. 16. Computing Machine Hour RateMachine Running Expenses Standing Expenses Or Or Variable Expenses Fixed Expenses Cost OfCost of Rent & Rates Lighting &Power HeatingSteam SupervisionOil InsuranceRepairs Cotton WasteMaintenance Indirect LabourDepreciation Consumable Stores Lubricants
  17. 17. Methods Of Overhead Absorption Common Costs to be apportioned Both Fixed/variable costs be divided by Machine HrsHourly Rates Machine Hr represents Cost of Operating Machine for One HourMachine 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. 18. Over Absorption Under Absorption
  19. 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. 20. Over Absorption Under Absorption Treatmenta) IF ABOUNT IS SIGNIFICANTNegative Supplementary = Over absorbed POHE’sOH Ab Rate Actual Value of BasePositive Supplementary = Under Absorbed POHE’SOH Ab Rate Actual Value Of Base
  21. 21. Over Absorption Under Absorption Treatmentb) Writing Off to Costing P/L A/CAmount is not SignificantSignificant but happened due to abnormal reasonsc) Carry forward to next period account for Absorption
  22. 22. ATTENTION COMMERCE STUDENTSACCOUNTING (FINANCIAL & COST) OFICMAP STAGE 1,2,3,4CA..MODULE B,C,DPIPFA (FOUNDATION,INTERMEDIATE,FINAL)BBA,MBAB.COM,M.COMMA-ECONOMICS—STATISTICSO/A LEVELKHALID AZIZ0322-3385752COST-ACCOUNTANTS@YAHOOGROUPS.COM

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