Determine the absorption rate of overheads, Cost Accounting

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Determine the Absorption Rate of Overheads

The budgeted production overheads and other budgeted data of compute are given as:

Budget

Overhead cost for the period = Kshs 36,000 Production department

Direct material cost Kshs 32000

Direct labour cost Kshs 40000

Machine hours Kshs 10000

Direct hours of labour Kshs 18000

Units of output Kshs 10000

Required

Find out the absorption rate of the overheads

Solution

Total overhead costs to be absorbed = Kshs 36000

Absorption rate Calculation

a) Direct material cost (36000/32000) x 100 = 112.50 percent

b) Direct labour (36000/40000) x 100 = 90 percent

c) Machine hours shs 36000/10000 hrs = Shs 3.6/machine hour

d) Labour direct hours shs 36000/18000 hrs = Shs 2/direct hour

e) Units of output 36000/10000 units = Shs 3.6/unit

f) Prime cost Direct labour + direct material cost = 32000 + 40000 = Shs 72000

∴ Overhead absorption rate based on prime cost = (36000/72000) x 100 = 50 percent

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