ABSORPTION COSTING

ABSORPTION COSTING – Explained

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ABSORPTION COSTING

Method of costing in which overheads are absorbed in relevant cost centers on appropriate rates known as overhead absorption rate (OAR). This rate is calculated on suitable basis like machine hour ,labour hour depending upon nature of activity

 

OAR= total of production overhead / suitable absorption base

 

Blanket Factory OH Rate

OH costs for the entire Factory   Total Output For all Departments in the factory

 

Departmental OH Rate       OH allocated each Department / Output of that Department

UNDER/OVER APPLIED OVERHEADS

OAR is calculated on the basis of budgeted figure. At end of year actual overheads absorbed are different so there rises under/over overhead

 

Actual FOH (Fixed + Variable)                                                        XXX

Applied FOH (Actual capacity attained * FOH Applied Rate)        (XXX)

_______

Under / Over Applied                                                                      XXX

 

 

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