Predetermined Overheads Absorption Rates & Illustration
What are predetermined overheads absorption rates?
PREDETERMINED ABSORPTION RATES |
Rates that are already been ascertained to:
These predetermined rates are obtained from:
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FORMULA FOR PREDETERMINED ABSORPTION RATE AS FOLLOWS: |
Budgeted Overhead for the period Budgeted units of base for the period |
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ILLUSTRATIONS ON THE VARIOUS ABSORPTION METHODS |
Details of ABC Engineering Ltd:  Budgeted production overheads        $70,000 Budgeted direct material cost            $10,000 Budgeted direct labour cost               $40,000 Budgeted labour hours                       $30,000 Budgeted machine hours                    $20,000 Budgeted output (units)                          5,000  A job was produced with the following details:  Material cost            $10 Labour cost               $30 Labour hours              20 Machine hours            10   Compute the different types of Overhead Absorption:  (a) Direct Material Cost Percentage Rate: Budgeted production overhead x 100 Budgeted direct material cost =$70.000 x 100 $10,000 =700%  Overhead absorbed by the job= $10 x700% =$70   (b) Direct Labour Cost Percentage Rate: Budgeted  overhead x 100 Budgeted direct material cost =$70.000 x 100 $40,000 =175%  Overhead absorbed by the job= $30 x175% =$52.50   (c) Prime Cost Percentage Rate: Budgeted overhead x 100 Prime cost =$70.000 x 100 $50,000($10,000+$40,000) =140%  Overhead absorbed by the job= $40($10+$30) x140% =$56   (d) Direct Labour Hour Rate: Budgeted overhead Budgeted labour hours =$70.000 30,000 =$2.34  Overhead absorbed by the job= 20 hours  x$2.34 =$46.80   (e) Machine Hour Rate: Budgeted  overhead Budgeted machine hours =$70.000 20,000 =$3.5 per machine hour  Overhead absorbed by the job= 10 hours x $3.5 =$35   (f) Cost Unit Rate: Budgeted overhead Budgeted output =$70.000 5,000 =$14 per unit  Overhead absorbed by the job= $14 x 1unit =$14 |
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