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ABSORPTION OF OVERHEADS

-PROF. Arti Modi

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What is absorption

The absorption of overheads is also known as therecovery of the overheads. Absorption of overheads isthe process of sharing the overhead costs by all theproducts of a particular department. Absorption of

overheads is the application of overheads to each unitof output. In other words, the process of ascertainingthe total overhead costs of each unit of output or jobby using overhead rate is known as the absorption ofoverhead. Thus the distribution of the overhead

expenses allotted to a particular department over theunits of produced in that department is absorption ofoverheads.

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How to find the recovery rate

In order to absorb the overheads by the units if outputof a particular department, the overhead absorptionrate or overhead rate should be determined. The twopopular methods of absorption of overheads are labor

hour rate and machine hour rate . The formula tocalculate overhead rate under these methods are givenbelow.

Labor hour rate = Total Overheads/Total Labor Hours

Machine hour rate = Total Overheads/ Total MachineHours

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Methods of Absorption of ManufacturingOverheads :

Methods of Absorption of Manufacturing

Overheads The main methods of absorptionof overheads are as follows: Rate per unit ofproduction Direct material cost method Directlabour cost or Direct wages method Directlabour hour or Production hour method Primecost method

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Under and overabsorption

Underabsorption and Overabsorption Overheadcosts are fully recovered from production, whenactual rate method of absorption is adopted. Butif a predetermined rate is used, the actual

expenses may be different from the charged orbudgeted overhead expenses. If the overheadsabsorbed are less than the overheads incurred, itis Underabsorption of overheads. If the amount

of overheads absorbed is more than the actualoverheads incurred it is Overabsorption ofoverheads.

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Causes of under and over absorption

Causes of Underabsorption or Overabsorption ofOverheads Error in estimating the overhead. Theanticipated output may be different from the actualworked. The hours anticipated may be more or less

than the actual hours worked. Due to fluctuations inthe prices of material or wage rates, the basis uponwhich the factory overhead is recovered fromproduction may not be correct. If overheads are notcharged to work-in-progress proportionately. Non-

recurring expenditure incurred due to unexpectedchanges in the methods of production. Seasonalfluctuations in the overhead expenses