Methods of absorption of overheads in the study of Cost Accounting

1. Chapter III Absorption of Overheads

2. Definition of Absorption Absorption is, ”the process of absorbing all overhead costs allocated or apportioned over a particular cost centre or production department by the units produced “- CIMA CAS 3 of ICWAI defines it as, “charging of overheads from cost centres to products or services by means of absorption rates for each cost center”

3. Methods of Absorption of Overheads Production Unit Method: Absorption Rate=

4. 2.Percentage of Direct Material Cost Method Absorption Rate =

5. 3.Percentage of Direct Labour Cost Method Absorption Rate=

6. 4. Percentage of Prime Cost Method Absorption Rate=

7. 5. Labour Hour Method Absorption Rate =

8. 6.Machine Hour Rate Method Absorption Rate=

9. Advantages of Machine Hour Rate Method Scientific Method Measurement of Time of Actual Working Measurement of Idle Time Comparison of cost and efficiency of different machines

10. Disadvantages Additional Work Additional Cost Not Suitable for Labour Intensive Industry Method not suitable when machine Hours can not be calculated