![\"\"](\"https:\/\/eponlinestudy.com\/wp-content\/uploads\/2022\/03\/accounting-for-overhead-tu-solution-absorption-of-overhead-machine-hour-rate-labour-hour-rate.jpg\")
<\/p>\n<\/p>\n
<\/p>\n
\u00a0<\/p>\n
It contents numerical problems and solution with clear working notes.<\/span><\/p>\n There are production departments and service departments in manufacturing company. \u00a0\u00a0<\/span><\/p>\n Direct materials and direct labour are NOT recorded in production departments.<\/span><\/p>\n But, direct materials and direct labour are recorded in service departments.<\/span><\/p>\n There are three methods to calculate machine hour rate and labour hour rate.<\/span><\/p>\n They are Absorption of overhead, allocation of overhead in direct method and allocation of overhead in step method.<\/span><\/p>\n <\/p>\n <\/p>\n All expenses other than direct expenses and production are overhead. <\/span><\/p>\n It is an aggregate of all indirect materials, indirect wages and indirect expenses. <\/span><\/p>\n Another name for overhead are on cost, burden cost, indirect expenses, non-productive cost, supplementary cost, logistic support cost and loading cost etc.<\/span><\/p>\n \u00a0<\/span><\/p>\n Definition of overhead <\/span><\/b><\/p>\n According to Institute of Cost and Management Account (ICMA, London),<\/span><\/i><\/b> <\/i>\u201cOverhead is an aggregate of indirect materials, indirect wages and indirect expenses<\/span><\/i>.<\/span>\u201d <\/span><\/i><\/p>\n \u00a0<\/span><\/p>\n Overheads represent fixed costs and relate to general business functions.<\/span><\/p>\n These costs still remain if production is shut down for a short period of time.<\/span><\/p>\n Some major overheads are:<\/span><\/p>\n Administrative overhead<\/span><\/p>\n General business overhead<\/span><\/p>\n Research overhead<\/span><\/p>\n Transportation overhead<\/span><\/p>\n Manufacturing overhead<\/span><\/p>\n Marketing overhead\u00a0 <\/span><\/p>\n Selling and promotional overhead etc.\u00a0 <\/span><\/p>\n \u00a0<\/span><\/p>\n \u00a0<\/p>\n Absorption means charging or sharing overhead to different cost units. <\/span><\/p>\n In other words, charging or sharing overhead to specific product or individual units is known absorption. <\/span><\/p>\n Generally, following methods are applied in absorption: <\/span><\/p>\n Production unit method | Cost per unit of output<\/span><\/p>\n Percentage of direct materials cost<\/span><\/p>\n Percentage of direct labour cost<\/span><\/p>\n Percentage of prime cost<\/span><\/p>\n Labour hour rate<\/span><\/p>\n Machine hour rate <\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/span><\/p>\n Under this method, the costs of service department are NOT distributed or apportioned to production department. <\/span><\/p>\n Overcharge and under charge is ignored in this method. <\/span><\/p>\n According to this method, the rate of overhead equals the total costs of the enterprise expressed as a fraction of the direct material costs. <\/span><\/p>\n Rate of overhead = Total overhead costs \u00f7 Total direct material cost<\/span><\/p>\n This method has the serious drawback that values of materials used in different items of manufacture may vary widely.<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\nConcept of Overhead <\/span><\/b><\/b><\/h2>\n
(1) Absorption of Overhead<\/span><\/b><\/h3>\n
(2) <\/span><\/b>Allocation of Overhead | <\/span><\/b>Direct Distribution Method<\/span><\/b><\/h3>\n
(3) Allocation of Overhead | Step Method<\/span><\/b><\/h3>\n
![\"\"](\"https:\/\/eponlinestudy.com\/wp-content\/uploads\/2021\/08\/book-covers-BBS-BBA-BBM-BCom-scaled.jpg\")
<\/a><\/span><\/p>\n