Example of over and under absorption of production overhead, Cost Accounting

Example of Over and under absorption of production overhead costs

By employing data from diagram assume such the production overhead absorption rate was computed where an activity of two hundred machine hours was estimated. Prepare a summary showing any over or beneath absorption of overhead cost whereas the real machine hours charged to jobs turns out to be as:

a) One hundred fifty hours

b) Two hundred fifty hours

Solution

Absorption rate is Shs. 5.50 per machine hour. It may be analyzed into fixed rate of Shs.2.50 per machine hour and variable rate; of Shs. 3 per machine hour.

a) Where real activity is one hundred fifty hours

 

Fixed

Variable

Total

 

Shs.

Shs.

Shs.

 Overhead incurred

500

450

950

 Variable overhead absorbed             

 

(450)

 

(150 x 3)

 

 

 

 Fixed overhead absorbed

(375)

 

 

 (150 x 2.50)

 

 

 

 Total Overhead absorbed

 

 

(825)

 (150 x 5.50)

____

____

___

 Under absorption of overhead          

125

NIL

125

b)  Where actual activity is two hundred fifty hours

 

Fixed Shs.

Variable Shs.

Total Shs.

 Overhead incurred

500

750

1250

 Variable overhead absorbed

 

(750)

 

 (250 x 3)

 

 

 

 Fixed overhead absorbed

(625)

 

 

 (250 x 2.50)

 

 

 

 Total Overhead absorbed

 

 

(1375)

 (250 x 5.50)

___                           

___

___

 Under absorption of overhead

125

NIL

125

c) The absorption and Expenditure level of production overhead cost

A charge in expenditure on an overhead cost item may happen due to  a charge in the price per unit and/or due to change in the number of units of the overhead commodity that are necessary. Expenditure changes can affect the absorption of both variable and fixed overheads.

Posted Date: 2/5/2013 7:35:39 AM | Location : United States







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