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
|