Page 194 - DCOM202_COST_ACCOUNTING_I

Cost Accounting – I

Notes 12. 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.
13. Over-absorbed overhead = Absorbed overhead – Incurred overhead
14. predetermined overhead rate is computed by dividing the budgeted overhead expenses by
the budgeted base.

9.5 Summary

z z Cost pertaining to a cost centre or cost unit may be broadly, divided into two portions,
direct and indirect.
z z The following are the main methods of absorbing factory overheads:
™ z percentage on direct material cost
™ z percentage on direct wages
™ z percentage on prime cost
™ z Direct labour hour rate
™ z Machine hour rate
™ z Rate per unit of output
z z The overheads are under absorbed if the actual overheads incurred are more than the
overheads absorbed.
z z The overheads are over absorbed if the actual overheads incurred are less than the
overheads absorbed

9.6 Keywords

Actual Overhead: The amount of manufacturing overhead actually incurred during an accounting
period.
Direct Wages: Wages from the primary form of employment.
Over Absorption of Overheads: The overheads are over absorbed if the actual overheads incurred
are less than the overheads absorbed.
Predetermined Rate: preset or planned rate.
Standard Cost: Factory cost to be accounted for the year.
Under Absorption of Overheads: The overheads are under absorbed if the actual overheads
incurred are more than the overheads absorbed.

9.7 Review Questions

1. What is Machine Hour Rate method? Explain and describe its areas of application.
2. Calculate Machine-hour Rate for Machine No. 5 which is one of five machines in operation
in a department of a factory. You are furnished with the following information:
(a) Cost of Machine No. 5, ` 1,000.
(b) Estimated Scrap Value at finish of working life (10 years) ` 100
(c) Normal running hours per annum, 1,800.

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