Cost Accounting: Overheads
Cost Accounting: Overheads
Cost Accounting: Overheads
ABSORPTION COSTING
Absorption costing is a costing system that is used in valuing inventory. It not only
includes the cost of materials and labour, but also both variable and fixed
manufacturing overhead costs. Absorption costing is also referred to as full
costing.
PRODUCTION OVERHEAD
The overhead absorbed in a period will be found out by multiplying overhead rate
by total number of units produced for the period.
MACHINE HOUR RATE
The machine hour rate is similar to the labour hour rate method and is used where
the work is performed primarily on machines.
Illustration :
If factory overhead is Rs 3, 00,000 and total machine hours are 1,500, the machine
hour rate is Rs 200 per machine hour (Rs 3, 00,000 ÷ 1500 hours).
ADMINISTRATION OVEHEAD
Administrative overhead is those costs not involved in the development or
production of goods or services. This is essentially all overhead that is not included
in manufacturing overhead.
Selling overhead refers to all costs of seeking to create and stimulate demand
or of securing orders .
Eg. Sales office expenses , advertisement, etc.
Distribution overhead refers to all expenses incurred from the time the product
is finished in the factory till it’s delivery to ultimate customers or consumers.
Eg. Rent of warehouse, packing charges , etc.
SPECIAL EFFECT OF OVERHEAD
Overhead refers to the ongoing costs to operate a business but excludes the
direct costs associated with creating a product or service.