Determine the Absorption Rate of Overheads
The budgeted production overheads and other budgeted data of compute are given as:
Budget
Overhead cost for the period = Kshs 36,000 Production department
Direct material cost Kshs 32000
Direct labour cost Kshs 40000
Machine hours Kshs 10000
Direct hours of labour Kshs 18000
Units of output Kshs 10000
Required
Find out the absorption rate of the overheads
Solution
Total overhead costs to be absorbed = Kshs 36000
Absorption rate Calculation
a) Direct material cost (36000/32000) x 100 = 112.50 percent
b) Direct labour (36000/40000) x 100 = 90 percent
c) Machine hours shs 36000/10000 hrs = Shs 3.6/machine hour
d) Labour direct hours shs 36000/18000 hrs = Shs 2/direct hour
e) Units of output 36000/10000 units = Shs 3.6/unit
f) Prime cost Direct labour + direct material cost = 32000 + 40000 = Shs 72000
∴ Overhead absorption rate based on prime cost = (36000/72000) x 100 = 50 percent