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