Over And Under Absorption of Production Overhead Costs, Cost Accounting

Over And Under Absorption of Production Overhead Costs

This may be analyzed beneath

a) Activity

This is level of the business or cost center. Expenditure on several items of production overhead costs will vary directly along with activity whereas others will be fixed irrespective of the changes in activity level. As an example, in a machine orientated, power cost and cost center will vary in proportion to machine hours where salary of the cost center manager will be fixed.

b) Level of expenditure on production overhead

Expenditure level might change from the budgeted level since of a change in the price of a change in the usage or an overhead item of the overhead item

c) Activity absorption and level of production overhead cost

In the table underneath the variable overhead absorbed per machine hour is constant as Shs.3 irrespective of the activity level. So the fixed overhead cost per machine hour depends on the activity level used as the base. If 100 machine hours are utilized, Shs.5 per machine hour should be charged in order to absorb the fixed overhead cost of Shs.500. and if 300 machine hours are utilized, Shs.1.67 per machine hour is an enough charge in order to absorb the net fixed overhead cost.

Diagram of Machining cost center

 Activity level

 Machine hrs

 

 Total fixed

 Overhead costs

 Total variable

 Overhead costs

 Total overhead  cost

 

 Average

 Machine

 

 Overhead

 Hour

 

C ost per

 

 

 Shs.

 Shs.

 Shs.

 Shs.

Shs.

Shs.

Shs.

 100

 500

 300

 800

5.00

3.00

8.00

 150

 500

 450

 950

3.33

3.00

6.33

 200

 500

 600

 1100

2.50

3.00

5.50

 250

 500

 750

 1250

2.00

3.00

5.00

 300

 500

 900

 1400

1.67

3.00

4.67

Production overheads will be absorbed via jobs or products at the previously determined rater per machine hour.

If the real number of machine hours utilized differs from the number utilized in the computation of the overhead absorption rate, an over or beneath absorption will happen.

Note that this problem does not happen along with variable overheads as the incidence of the cost such like power cost varies along with changes in activity.

Posted Date: 2/5/2013 7:25:02 AM | Location : United States







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