Overhead Absorption

charlotte224466

So I've been working through my course and thought I'd understood overhead absorption rate! Got onto the next chapter and the question was putting it all together. So I worked through it, checked my answer and it was wrong! Went back to the previous chapter and used the example to work through and I still didn't get the correct answer. Just wondering if someone could clarify the equation for working out absorption rate and then how you calculate the overheads absorbed. I really thought I understood it, I got all the previous questions right so I'm a little confused. (Emailed my college to check they haven't made a typo) but I'm sure they would of let me know by now! Thanks

Nps

If you can summarise the question here, we can work through it with you. It's easier to explain with figures.

SandyHood

Charlotte
Apportioning overheads to departments is not necessarily an exact science. I could work for one firm where their apportionment policy is different from the firm you work for. A lot of text book questions state the total heating cost. Some firms look at the production area of the factory and divide total budgeted heating cost by the total area to find the heating cost per square metre. Then they multiply the heating cost per square metre by the square metres in each department to find the heating cost per department. But one place I worked used the number of heaters, the total heating cost was divided by the number of heaters and the department cost was then calculated as the cost per heater x the number of heaters in the department.

Do you think that your answer is different from the answer that you checked against because some apportionment bases were ambiguous and both approaches were logical? If so, you could simply have a different (but correct) answer.

Your post asked about the formula for working out the absorption rate:
......Total budgeted overhead for the department...... = Overhead absorption rate
Total basis for absorption (e.g. budgeted labour hours)

Your post also asked how to calculate the overhead absorbed:

Overhead absorption rate e.g. per labour hour x the ACTUAL hours worked = Overhead absorbed

And I'll add:
(Under)/Over absorbed overhead is found by
Overhead absorbed - Actual Overhead cost incurred = (Under)/Over absorbed overhead