Page 182 - DCOM202_COST_ACCOUNTING_I

Cost Accounting – I

Notes overheads divided by the quantity or the value of the base selected determines the overhead rate.
The following are the overhead rates:
(i) Actual overhead rate,
(ii) predetermined overhead rate, and
(iii) Standard rate.
(i) Actual overhead rate is determined by dividing the overhead expenses incurred during
the accounting period by the actual quantum of the base selected, such as unit of products,
direct wages, direct material cost, labour hours, or machine hours. The basic principle in
costing is that the recovery of overhead should be made on actual basis, as for as possible,
so that overheads may be directly charged to jobs, processes, operations, or products.

Actual overhead expenses incurred during a period
Actual Rate =
Actual quaantity or value of the base for the period
OR
Actual overheads
Actual Rate =
Actual base
Actual overhead rate method is not helpful as the actual rate can be ascertained only after
the accounting period is over when the actual figures would be available. This calculation
is delay in finding out the costs of present production.

(ii) Predetermined overhead rates are those which are established well in advance before
commencement of production. predetermined overhead rate is computed by dividing the
budgeted overhead expenses by the budgeted base. predetermination of overhead rates is
of practical use in regard to managerial control over costs. On the basis of predetermined
overhead rates, prompt preparation of cost estimate and quotations as well as fixation of
sales prices is possible. Adoption of predetermined overhead absorption rates is practically
useful in organizations following a budgetary control system.
Estimatedfactory overhead forthe budgeted period
= ×100
Estimated direct material cos tofproduction
e

predetermined overhead rate is practical use in costing. predetermined overhead rate
calculated as follows:

EstimatedorBudgetedoverheads
predetermined Rate =

EstimatedorBudgetedbase

(iii) Standard rate is used in place of predetermined rate and calculated from the following
formulas:
Standard overheads
Standard Rate =
Standard base
9.3 Methods of Absorption

Different methods may be adopted for determination of absorption rates for fixed and variable
overheads. The fixed overhead rate serves as a measure of utilisation of the facilities while the
extent of idle capacity is indicated by under absorption.

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