Page 84 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Unit 5: Overheads

10. ......................is the cost of running a machine per hour. Notes

11. The rate per unit is obtained by dividing the overheads by the number of .......................
5.3 Under and Over Absorption of Overheads

The absorption of overheads is based on some pre-determined rates. The actual overheads
incurred may or may not be equal to the overheads absorbed.

Did u know? What are pre-determined rates?
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 fi xation of
sales prices is possible. Adoption of predetermined overhead absorption rates is practically
useful in organizations following a budgetary control system.
Estimated factory overhead for the budgeted period
= × 100
Estimated direct material cost of production

5.3.1 Under Absorption of Overheads

The overheads are under absorbed if the actual overheads incurred are more than the overheads
absorbed.

Did u know? What is actual overhead rate?
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 quantity or value of the base for the period
Under absorption of Overheads = Incurred overhead – Absorbed overhead

Example:

Dr. Cr.
Date Particular J/F Amount (`) Date Particular J/F Amount (`)
01. To SLCA a/c 210000 01. By WIP a/c 390000
02. To WLCA a/c 135000 By closing P/L a/c 20000
03. To GLA a/c 65000

410000 410000

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