{"id":3351,"date":"2020-02-16T07:48:48","date_gmt":"2020-02-16T07:48:48","guid":{"rendered":"https:\/\/commerceiets.com\/?p=3351"},"modified":"2020-02-16T07:48:48","modified_gmt":"2020-02-16T07:48:48","slug":"absorption-of-overheads","status":"publish","type":"post","link":"https:\/\/commerceiets.com\/absorption-of-overheads\/","title":{"rendered":"ABSORPTION OF OVERHEADS"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/commerceiets.com\/absorption-of-overheads\/#ABSORPTION_OF_OVERHEADS\" title=\"ABSORPTION OF OVERHEADS\">ABSORPTION OF OVERHEADS<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/commerceiets.com\/absorption-of-overheads\/#Absorption_of_overheads_refers_to_the_process_of_recovering_allocated_cost_to_a_particular_cost_centre_by_the_units_produced_in_that_cost_centre\" title=\"Absorption of overheads refers to the process of recovering allocated cost to a particular cost centre by the units produced in that cost centre. \">Absorption of overheads refers to the process of recovering allocated cost to a particular cost centre by the units produced in that cost centre. <\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/commerceiets.com\/absorption-of-overheads\/#VARIOUS_OVERHEAD_ABSORPTION_RATES\" title=\"VARIOUS OVERHEAD ABSORPTION RATES\">VARIOUS OVERHEAD ABSORPTION RATES<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/commerceiets.com\/absorption-of-overheads\/#METHODS_OF_ABSORBING_FACTORY_OVERHEADS\" title=\"METHODS OF ABSORBING FACTORY OVERHEADS\">METHODS OF ABSORBING FACTORY OVERHEADS<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/commerceiets.com\/absorption-of-overheads\/#ABSORPTION_OF_ADMINISTRATIVE_OVERHEADS\" title=\"ABSORPTION OF ADMINISTRATIVE OVERHEADS\">ABSORPTION OF ADMINISTRATIVE OVERHEADS<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/commerceiets.com\/absorption-of-overheads\/#ABSORPTION_OF_SELLING_AND_DISTRIBUTION_OVERHEADS\" title=\"ABSORPTION OF SELLING AND DISTRIBUTION OVERHEADS\">ABSORPTION OF SELLING AND DISTRIBUTION OVERHEADS<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h1 class=\"has-text-align-center wp-block-heading\" id=\"absorption-of-overheads\"><span class=\"ez-toc-section\" id=\"ABSORPTION_OF_OVERHEADS\"><\/span><strong>ABSORPTION OF OVERHEADS<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h1>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"absorption-of-overheads-refers-to-the-process-of-recovering-allocated-cost-to-a-particular-cost-centre-by-the-units-produced-in-that-cost-centre\"><span class=\"ez-toc-section\" id=\"Absorption_of_overheads_refers_to_the_process_of_recovering_allocated_cost_to_a_particular_cost_centre_by_the_units_produced_in_that_cost_centre\"><\/span>Absorption of overheads refers to the process of recovering allocated cost to a particular cost centre by the units produced in that cost centre. <span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"259\" height=\"194\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2022\/01\/download-40.png\" alt=\"ABSORPTION OF OVERHEADS\" class=\"wp-image-5065\"\/><figcaption><strong>ABSORPTION OF OVERHEADS<\/strong><\/figcaption><\/figure>\n\n\n\n<p>Absorption of <a aria-label=\"Overheads (opens in a new tab)\" href=\"https:\/\/commerceiets.com\/overhead\/\" target=\"_blank\" rel=\"noreferrer noopener\">Overheads<\/a> means the distribution of the overhead expenses allotted to a particular department over the units produced in that department. Overhead absorption is accomplished by overhead rates. Absorption of overheads may also be defined as recording of overheads in Cost Accounts on an estimated basis with the help of a predetermined overhead rate, which is computed at normal or average or maximum capacity.<\/p>\n\n\n\n<p>In order to determine the absorption of overhead in costs of\njobs, products or process, a rate is calculated and it is called as <strong>&#8220;Overhead Absorption Rate&#8221; <\/strong>or\n<strong>&#8220;Overhead Rate.&#8221;<\/strong> The\noverhead rate can be calculated as below:<\/p>\n\n\n\n<p><strong>OVERHEAD ABSORPTION\nRATE = OVERHEAD EXPENSES\/ TOTAL QUANTITY OR VALUE<\/strong><\/p>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\" id=\"various-overhead-absorption-rates\"><span class=\"ez-toc-section\" id=\"VARIOUS_OVERHEAD_ABSORPTION_RATES\"><\/span><strong>VARIOUS OVERHEAD ABSORPTION RATES<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The overhead rate of expenses for absorbing them to\nproduction may be estimated on the following three basis:<\/p>\n\n\n\n<ul><li>The figure of the previous year or period may be adopted as the overhead rate to be charged on production in the current year. <\/li><\/ul>\n\n\n\n<ul><li>The overhead rate for the year may be determined on the basis of the estimated expenses and anticipated volume of production or activity. <\/li><\/ul>\n\n\n\n<ul><li>The overhead rate for the year may be determined on the basis of normal volume of output or capacity of the business. <\/li><\/ul>\n\n\n\n<p><strong>ACTUAL OVERHEAD RATE<\/strong><\/p>\n\n\n\n<p>This is also known as historical overhead rate. This rate is\nobtained by dividing the overhead expenses incurred during the accounting\nperiod by the actual quantum (quantity\/value) of the base selected. This rate is\ndetermined as follows: <\/p>\n\n\n\n<p><strong>Actual overhead rate\n= Actual overhead for the period\/ Actual quantity or value of the base for the\nperiod<\/strong><\/p>\n\n\n\n<p>This method suffers from the following limitations:<\/p>\n\n\n\n<p>&nbsp;(i) Actual overhead\nrate cannot be determined until the end of the period. <\/p>\n\n\n\n<p>(ii) Seasonal or cyclical influences cause wide fluctuations\nin the actual overhead cost and actual volume of activity. <\/p>\n\n\n\n<p>(iii) Actual cost is generally used for comparison with the\npredetermined figures for the purpose of control. Thus, it is useful only when\ncompared with the established norms or standards. <\/p>\n\n\n\n<p><strong>PRE-DETERMINED\nOVERHEAD RATE <\/strong><\/p>\n\n\n\n<p>Pre-determined overhead rate is determined in advance of the\nactual production and is computed by dividing the budgeted overhead expenses\nfor the accounting period by the budgeted base for the period.<\/p>\n\n\n\n<p><strong>Pre-determined\noverhead rate = Budgeted overhead for the period\/ Budgeted base for the period<\/strong><\/p>\n\n\n\n<p>This computation of a pre-determined overhead rate is more\npractical and has the following advantages:<\/p>\n\n\n\n<p>(i) Pre-determined overhead rate facilitates product cost\ndetermination immediately after production is completed. <\/p>\n\n\n\n<p>(ii) In those concerns where the budgetary control system is\nin operation, all the data for the purpose of calculation of pre-determined\noverhead rate is available without any extra clerical cost. <\/p>\n\n\n\n<p>(iii) It is useful when cost plus contracts are undertaken. <\/p>\n\n\n\n<p>(iv) Cost estimating and competitive pricing offer ideal\nsituations for use of pre-determined overhead rates. <\/p>\n\n\n\n<p><strong>BLANKET AND MULTIPLE\nOVERHEAD RATES <\/strong><\/p>\n\n\n\n<p>Blanket overhead rate refers to the use of one single or\ngeneral overhead rate for the whole factory. The blanket rate is used in those\nfactories: <\/p>\n\n\n\n<p>(a) Where only one major product in continuous process is\nbeing produced. <\/p>\n\n\n\n<p>(b) Where several products are produced it can be applied\nonly if: <\/p>\n\n\n\n<ul><li>all products pass through all departments; and<\/li><li>all products are processed for the same length\nof time in each department. <\/li><\/ul>\n\n\n\n<p>This rate is calculated as follows: <\/p>\n\n\n\n<p><strong>Blanket overhead rate\n= Overhead Cost for the entire factory\/ Base for theperiod<\/strong><\/p>\n\n\n\n<p>When different rates are computed for each producing\ndepartment, service department, cost centre, each product or product line, each\nproduction factor, and for fixed overhead and variable overhead, then they are known\nas multiple rates. It is calculated as under:<\/p>\n\n\n\n<p><strong>Overhead rate = Overhead\ncost allocated and apportioned to each cost centre\/ Corresponing base<\/strong><\/p>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\" id=\"methods-of-absorbing-factory-overheads\"><span class=\"ez-toc-section\" id=\"METHODS_OF_ABSORBING_FACTORY_OVERHEADS\"><\/span><strong>METHODS OF ABSORBING FACTORY OVERHEADS<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"259\" height=\"194\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2022\/01\/download-40.png\" alt=\"ABSORPTION OF OVERHEADS\" class=\"wp-image-5065\"\/><figcaption>ABSORPTION OF OVERHEADS<\/figcaption><\/figure>\n\n\n\n<p>It includes all the indirect costs incurred in factory in\nrespect of manufacturing operations. It includes the cost of indirect materials\nand indirect labor.<\/p>\n\n\n\n<p><strong>Example: <\/strong>Cost of lubricating oil, coal, gas and fuel, wages of store-keeper, salaries of foremen, supervisors, factory rent etc.<\/p>\n\n\n\n<p>The following are the main methods of absorption of\nmanufacturing or factory overheads:<\/p>\n\n\n\n<p><strong>(a) Direct Material\nCost Method<\/strong>: Under this method percentage of factory expenses to value of\ndirect materials consumed in production is calculated to absorb manufacturing\noverheads.<\/p>\n\n\n\n<p><strong>Overhead Rate =\nProduction Overhead Expenses (Budgeted)\/ Anticipated Direct Material Cost<\/strong><\/p>\n\n\n\n<p>If in a factory the anticipated cost of direct material is\nRs. 4,00,000 and the over head budgeted expenses are Rs. 1,00,000, then the\noverhead rate will be 25% i.e.( Rs.1,00,000 \u00f7 Rs.4,00,000) of the materials\nused. It is assumed that relationship between materials and factory expenses\nwill not change. This method is simple and can be adopted under the following\ncircumstances:<\/p>\n\n\n\n<ul><li>Where the proportion of overheads to the total\ncost is significant.<\/li><li>Where the prices of materials are stable.<\/li><li>Where the output is uniform ie. Only one kind of\narticle is produced.<\/li><\/ul>\n\n\n\n<p><strong>(b) Direct Labor Cost\n(or Direct Wages) Method:<\/strong> This is a simple and easy method and widely used\nin most of the concerns. The overhead rate is calculated as under:<\/p>\n\n\n\n<p><strong>Overhead Rate=\nProduction Overhead Expenses\/ Direct Labour Cost<\/strong><\/p>\n\n\n\n<p>This method is suitable under the following situations:<\/p>\n\n\n\n<ul><li>Where direct labor constitutes a major\nproportion of the total cost of production.<\/li><li>Where production is uniform.<\/li><li>Where labor employed and types of work performed\nare uniform.<\/li><li>Where the ratio of skilled and unskilled labor\nis constant.<\/li><li>Where there are no variations in the rates of\npay i.e., the rates of pay and the methods are the same for the majority of the\nworkers in the concern.<\/li><\/ul>\n\n\n\n<p>In some concerns a separate rate is calculated for the\nfringe benefits and applied on the basis of direct labour cost.<\/p>\n\n\n\n<p><strong>(c) Prime Cost Method:\n<\/strong>Under this method the recovery rate is calculated dividing the budgeted\noverhead expenses by the aggregate of direct materials and direct labour cost\nof all the products of a cost centre. <\/p>\n\n\n\n<p><strong>Overhead Recovery\nRate = Production Budgeted Overhead Expenses\/ Anticipated Direct Materials and\nDirect Labour Cost<\/strong><\/p>\n\n\n\n<p><strong>(d) Direct Labour (or\nProduction) Hour Method:<\/strong> This rate is obtained by dividing the overhead\nexpenses by the aggregate of the productive hours of direct workers. The\nformula is<\/p>\n\n\n\n<p><strong>Overhead rate =\nProduction Overhead Expenses\/ Direct Labor Hours<\/strong><\/p>\n\n\n\n<p>If in a particular period the overhead expenses are\nRs.50,000 and direct labor hours are 1,00,000, then overhead labour rate will\nbe Re.0.50 (i.e., Rs.50,000 \u00f71,00,000).<\/p>\n\n\n\n<p>This rate is suitable where:<\/p>\n\n\n\n<ul><li>The production is done using more of labour and\nless technology is used.<\/li><li>It is desired to taken into consideration the\ntime factor.<\/li><li>The rate may not be affected by the method of\nwage payment or the grade or the rate of workers.<\/li><\/ul>\n\n\n\n<p><strong>(e) Machine Hour\nRate: <\/strong>Machine hour rate is the cost of running a machine per hour. It is\none of the methods of absorbing factory expenses to production. There is a\nbasic similarity between the machine hour and the direct labour hour rate\nmethods, in so far as both are based on the time factor. The choice of one or\nthe other method depends on the actual circumstances of the individual case. In\nrespect of departments or operations, in which machines predominate and the\noperators perform a relatively a passive part, the machine hour rate is more\nappropriate. This is generally the case for operations or processes performed\nby costly machines which are automatic or semi-automatic and where operators are\nneeded merely for feeding and tending them rather than for regulating the\nquality or quantity of their output. In such cases, the machine hour rate\nmethod alone can be depended on to correctly apportion the manufacturing\noverhead expenses to different items of production. What is needed for\ncomputing the machine hour rate is to divide overhead expenses for a specific\nmachine or group of machines for a period by the operating hours of the machine\nor the group of machines for the period. It is calculated as follows:<\/p>\n\n\n\n<p><strong>Machine hour rate =\nAmount of overheads\/ Machine hours during a given period<\/strong><\/p>\n\n\n\n<p>The following steps are required to be taken for the\ncalculation of machine hour rate:<\/p>\n\n\n\n<p>1) Each machine or group of machine should be treated as a\ncost centre.<\/p>\n\n\n\n<p>2) The estimated overhead expenses for the period should be\ndetermined for each machine or group of machines.<\/p>\n\n\n\n<p>3) Overheads relating to a machine are divided into two\nparts i.e., fixed or standing charges and variable or machine expenses.<\/p>\n\n\n\n<p>4) Standing charges are estimated for a period for every\nmachine and the amount so estimated is divided by the total number of normal working\nhours of the machine during that period in order to calculate an hourly rate\nfor fixed charges. For machine expenses, an hourly rate is calculated for each\nitem of expenses separately by dividing the expenses by the normal working\nhours.<\/p>\n\n\n\n<p>5) Total of standing charges and machines expenses rates\nwill give the ordinary machine hour rate.<\/p>\n\n\n\n<p>Some of the expenses and the basis of apportionment are\ngiven below.<\/p>\n\n\n\n<ul><li>Rent and Rates &#8211; Floor area occupied by each\nmachine including the surrounding space.<\/li><li>Heating and Lighting &#8211; The number of points used\nplus cost of special lighting or heating for any individual machine,\nalternatively according to floor area occupied by each machine.<\/li><li>Supervision \u2013 estimated time devoted by the\nsupervisory staff to each machine.<\/li><li>Lubricating Oil and Consumable Stores \u2013 On the\nbasis of past experience.<\/li><li>Insurance \u2013 Insurable value of each machine<\/li><li>Miscellaneous Expenses \u2013 Equitable basis\ndepending upon facts.<\/li><\/ul>\n\n\n\n<p><strong>Machine Expenses<\/strong><\/p>\n\n\n\n<ul><li>Depreciation \u2013 cost of machine including cost of\nstand-by equipment such as spare motors, switchgears etc., less residual value\nspread over its working life.<\/li><li>Power \u2013 Actual consumption as shown by meter\nreadings or estimated consumption ascertained from past experience.<\/li><li>Repairs \u2013 Cost of repairs spread over its\nworking life.<\/li><\/ul>\n\n\n\n<p><strong>Advantages of Machine\nHour Rate <\/strong><\/p>\n\n\n\n<ul><li>Where machinery is the main factor in\nproduction, it is usually the best method of charging machine operating\nexpenses to production. <\/li><li>The under-absorption of machine overheads would\nindicate the extent the machines have been idle. <\/li><li>It is particularly advantageous where one\noperator uses several machines (e.g., automatic screw manufacturing machines)\nor where several operators are engaged in one machine (e.g., the belt press\nused in making conveyor belts). <\/li><li>It is a logical method and takes into\nconsideration the time factor completely. <\/li><\/ul>\n\n\n\n<p><strong>Disadvantages of\nMachine Hour Rate <\/strong><\/p>\n\n\n\n<ul><li>Additional data concerning the operating time of\nmachines, not otherwise necessary, must be recorded and maintained. <\/li><li>As general data concerning rates for all the\nmachines in a department may be suitable, the computation of a separate machine\nhour rate for each machine or group of machines would mean additional work. <\/li><li>It gives inaccurate result if hand labour is\nequally important.<\/li><\/ul>\n\n\n\n<p><strong>(f) Rate Per Unit of\nProduction:<\/strong> This method is simple, direct and easy. It is suitable for mining\nand other extractive industries, foundries and brick laying industries, where\nthe output is measured in convenient physical units like number, weight, volume\netc. the rate is calculated as under:<\/p>\n\n\n\n<p><strong>Overhead Rate=\nOverhead expenses (budgeted)\/ Budgeted production<\/strong><\/p>\n\n\n\n<p><strong>Example:<\/strong> If the\noverhead expenses (budgeted) are Rs. 30,000 and the budgeted production is\n10,000 tonnes, then overhead rate according to this method will be Rs. 3 per tonne.<\/p>\n\n\n\n<p>The main limitation of this method is that it is restricted\nto those concerns which produce only one item of product or a few sizes,\nqualities or grades of the same product. If more than one item are produced,\nthen it is essential to express dissimilar units against a common denominator\non weightage or point basis.<\/p>\n\n\n\n<p><strong>(g) Sale Price\nMethod: <\/strong>Under this method, budgeted overhead expenses are divided by the\nsale price of units of production in order to calculate the overhead recovery\nrate. The formula is sale price of units of production in order to calculate\nthe overhead recovery rate, the formula is<\/p>\n\n\n\n<p><strong>Overhead Recovery\nRate= Budgeted overhead expenses\/ Sale value of units of production<\/strong><\/p>\n\n\n\n<p>This method is more suitable for apportioning of administration, selling and distribution, research, development and design costs of products. It can also be used with advantage for the appropriation of joint products costs.<\/p>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\" id=\"absorption-of-administrative-overheads\"><span class=\"ez-toc-section\" id=\"ABSORPTION_OF_ADMINISTRATIVE_OVERHEADS\"><\/span><strong>ABSORPTION OF ADMINISTRATIVE OVERHEADS<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Administrative expenses bear only a remote relationship\neither to the manufacturing or to the selling functions. The administrative\ndivisions being responsible only for laying down general policies of the\ncompany, its benefits, by and large, are intangible and hence difficult to\nmeasure. Also, administrative expenses are generally period costs are constant;\nthey are not affected by any fluctuations in the volume of production of sales\nactivity. A careful watch over the variable administrative expenses, e.g.,\npostage, stationery, office maintenance and upkeep, office transport, repairs,\netc., is nevertheless necessary since top executives may sometimes overlook the\nneed for exercising strict economy in expenses with which they themselves are\nconcerned. <\/p>\n\n\n\n<p>There are three distinct methods of accounting for\nadministrative overheads. <\/p>\n\n\n\n<p><strong>Apportioning between\nproduction and sales departments <\/strong><\/p>\n\n\n\n<p>This method recognises only two basic functions of a\nmanufacturing concern, i.e. manufacturing and selling and distribution. Thus,\nadministrative overheads are apportioned over production and sales departments.\n<\/p>\n\n\n\n<p>Therefore, each of the department should be charged with the\nproportionate share of them. When this method is adopted, administrative\noverheads lose their identity and get merged with production and selling and\ndistribution overheads. <\/p>\n\n\n\n<p><strong>Transfer to profit\nand loss account <\/strong><\/p>\n\n\n\n<p>As per this method, administrative overheads are concerned\nwith the formulation of policies and thus are not directly concerned with\neither the production or the selling and distribution functions. Further\nadministrative overheads are mainly of fixed costs. Lastly, there appears to be\nno equitable base to charge administration overheads to other functions or the\nproducts. In view of these arguments, the administrative overheads are charged\nto profit and loss account. <\/p>\n\n\n\n<p><strong>Treating\nadministrative overheads as a separate addition to the cost of jobs or\nproducts. <\/strong><\/p>\n\n\n\n<p>This method considers administration as a separate function\nlike production and sales and, as such costs relating to formulating the\npolicy, directing the organisation and controlling the operations are taken as\na separate charge to cost of the jobs or a product, sold along with the cost of\nother functions. The following bases may be adopted for such absorption: <\/p>\n\n\n\n<ul><li>Works cost <\/li><li>Sales value\/quantity <\/li><li>Gross profit on sales <\/li><li>Units manufactured <\/li><li>Conversion cost.<\/li><\/ul>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\" id=\"absorption-of-selling-and-distribution-overheads\"><span class=\"ez-toc-section\" id=\"ABSORPTION_OF_SELLING_AND_DISTRIBUTION_OVERHEADS\"><\/span><strong>ABSORPTION OF SELLING AND DISTRIBUTION OVERHEADS<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Selling costs or overhead expenses are those incurred for\nthe purpose of promoting the marketing and sales of different products.\nDistribution expenses, on the other hand, are expenses relating to delivery and\ndispatch of goods sold. <\/p>\n\n\n\n<p><strong>Absorption of selling\nand distribution expenses <\/strong><\/p>\n\n\n\n<p>If selling and distribution expenses are small, they may be\nincluded in office expenses. If these expenses are considerable, one of the\nfollowing magnitudes may be followed: <\/p>\n\n\n\n<p><strong>Percentage of works\ncost <\/strong><\/p>\n\n\n\n<p>In this method, on the basis of past year\u2019s experience the\npercentage of selling expenses to works cost is ascertained and used for\nfinding out the selling and distribution expenses to be charged to each job or\nproduct. This method can be followed successfully if one product is produced or\nwhere selling expenses are small though various articles are produced. The\nmethod will not take into consideration different efforts involved in selling\nunless the effort is in the same proportion as the cost of production. <\/p>\n\n\n\n<p><strong>A percentage on the\nselling price <\/strong><\/p>\n\n\n\n<p>From an analysis of past year\u2019s accounts one can determine\nthe percentage which normal selling and distribution expenses bear to the\nnormal turnover. Suppose, on the basis of the previous year\u2019s experience it is\nascertained that selling expenses are 10% of the turnover, and the cost of\nproduction is 9,000, then (10\/ 100- 10)= 10\/90 or 1\/9 of the cost of production\nwill be charged as selling and distribution expenses. This method can be\nfollowed in those cases, where the products are sold at fixed prices and the\nselling price of each article is known. If prices fluctuate, the method will\nnot give good results. <\/p>\n\n\n\n<p><strong>An estimated rate per\nunit <\/strong><\/p>\n\n\n\n<p>If there is only one product, the total estimated selling expenses can be divided by the total estimated number of unit to be sold to give the selling on cost per unit. It would be better if constant and variable expenses are separately treated, if there is more than one product.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/cost-accounting\/\">Cost Accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/scope-of-cost-accounting-pdf\/\">Scope of cost accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/elements-of-cost\/\">Elements of cost<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/types-of-cost\/\">Types of cost<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/material-control-in-cost-accounting-pdf\/\">Material control<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/perpetual-inventory-system\/\">Perpetual inventory system<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/pricing-of-materials\/\">Pricing of materials<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/bin-card\/\">Bin Card<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/store-ledger\/\">Stores Ledger<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/incentive-plans\/\">Incentive plans<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/overhead\/\">Overheads<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/accounting-treatment-of-idle-time\/\">Idle time<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/system-of-wage-payment-in-cost-accounting\/\">System of wage payment in cost accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-time-rate-system-and-piece-rate-system\/\">Time rate vs piece rate wage system<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/cost-centre\/\">Cost Center<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/labor-turnover\/\">Labour Turnover<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/difference-between-management-accounting-and-cost-accounting\/\">Difference between management accounting and cost accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/allocation-and-apportionment-of-overheads\/\">Allocation and apportionment of overheads<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-allocation-and-apportionment-of-overheads\/\">Allocation vs Apportionment of overheads<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/absorption-of-overheads\/\">Absorption of overheads<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/over-absorption-and-under-absorption-of-overheads\/\">Over absorption and under absorption of overheads<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/activity-based-costing\/\">Activity based costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-traditional-costing-and-activity-based-costing\/\">Traditional costing vs ABC system<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/reconciliation-of-accounts\/\">Reconciliation of accounts<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/unit-costing\/\">Unit costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/cost-sheet-format\/\">Cost sheet format<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/cost-sheet-vs-production-account\/\">Cost sheet vs production sheet<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/job-costing\/\">Job costing<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/batch-costing\/\">Batch Costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-job-costing-and-batch-costing\/\">job costing vs batch costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/contract-costing\/\">Contract costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-job-costing-and-contract-costing\/\">Job Costing vs Contract costing<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/process-costing\/\">Process Costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/process-costing-vs-job-costing\/\">Process costing vs job costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/joint-products\/\">Joint products<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/by-products\/\">By Product&nbsp;<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/equivalent-production\/\">Equivalent production<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/marginal-costing\/\">Marginal costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/applications-of-marginal-costing\/\">Application of marginal costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/cost-volume-profit-analysis\/\">Cost volume profit analysis<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/tools-and-techniques-of-marginal-costing\/\">Tools and techniques of marginal costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/budget\/\">Budget<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/break-even-point\/\">Break even point<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/process-of-budgetary-control\/\">Process of budgetary control<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/explain-the-advantages-and-limitations-of-budgetary-control\/\">Advantages and limitations of budgetary control<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/budgetary-control\/\">Budgetary Control<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/zero-base-budgeting\/\">Zero base budgeting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/standard-costing\/\">Standard Costing<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/variance-analysis\/\">Variance Analysis<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-standard-costing-and-budgetary-control\/\">Standard costing vs budgetary control<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-management-accounting-and-cost-accounting\/\">Management accounting vs cost accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-financial-accounting-management-accounting-and-cost-accounting\/\">Cost accounting vs financial accounting<\/a><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link\" href=\"https:\/\/www.linkedin.com\/in\/kajal-mahajan-7549b2197\/\" target=\"_blank\" rel=\"noreferrer noopener\">CONNECT ON LINKEDIN<\/a><\/div>\n<\/div>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"512\" height=\"152\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-cropped-Presentation-resize-1.jpg\" alt=\"ABSORPTION OF OVERHEADS\" class=\"wp-image-4836\" srcset=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-cropped-Presentation-resize-1.jpg 512w, https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-cropped-Presentation-resize-1-300x89.jpg 300w\" sizes=\"(max-width: 512px) 100vw, 512px\" \/><figcaption>ABSORPTION OF OVERHEADS<\/figcaption><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>ABSORPTION OF OVERHEADS Absorption of overheads refers to the process of recovering allocated cost to a particular cost centre by the units produced in that cost centre. Absorption of Overheads means the distribution of the overhead expenses allotted to a particular department over the units produced in that department. Overhead absorption is accomplished by overhead&#8230;<\/p>\n<p class=\"more-link-wrap\"><a href=\"https:\/\/commerceiets.com\/absorption-of-overheads\/\" class=\"more-link\">Read More<span class=\"screen-reader-text\"> &ldquo;ABSORPTION OF OVERHEADS&rdquo;<\/span> &raquo;<\/a><\/p>\n","protected":false},"author":2,"featured_media":3352,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[187],"tags":[],"_links":{"self":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts\/3351"}],"collection":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/comments?post=3351"}],"version-history":[{"count":0,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts\/3351\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/media\/3352"}],"wp:attachment":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/media?parent=3351"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/categories?post=3351"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/tags?post=3351"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}