Page 19 - Cost Accounting - Ready Reckoner

16

Computation of Overhead Rate (5 methods):

OH’s are absorbed to every unit of product or service by any of the following five
methods.

′
1. On the basis of Direct Material Cost : x 100

′
2. On the basis of Direct Wage Cost : x 100

′
3. On the basis of Direct Labour Hours :

′
4. On the basis of Machine Hours :
ℎ

′
5. On the basis of Prime Cost : x 100

[Prime Cost = D.M + D.L + D.E]

 Factory Overheads are absorbed on the basis of Direct Wages.

 Administration and selling OH’s are absorbed on the basis of works costs.

Under Absorption/ Over Absorption of Overhead and its treatment:

Applied/ absorbed OH’s are estimates and they tend to vary with actual OH’s.

If actual OH’s are more than absorbed OH’s, it is called under absorption.

If actual OH’s are less than absorbed OH’s, it is called over absorption.