In this article we will discuss about the single and departmental overhead absorption rates.
Single Overhead Absorption Rate:
It is also called as ‘blanket overhead absorption rate’. It is a common absorption rate used throughout a factory and for all jobs and units of output irrespective of the departments in which they were produced or processed. It is a one single overhead absorption rate for the whole of the factory.
It may be computed as follows:
= Overhead costs for the entire factory/Total quantity of the base selected
The base can be output, total labour hours, total machine hours etc. The single overhead rate may be applied in factories where only one major product is produced on continuous basis.
Departmental Overhead Absorption Rates:
The single overhead absorption rate is not appropriate where there are number of departments in the factory and jobs do not spend an equal amount of time in each department. In some cases, all the jobs or units may not pass through all the departments, in a factory.
In such cases departmental overhead absorption of respective departments is applied to the jobs or units depending on the time spent in each department instead of single overhead absorption rate.
The departmental overhead absorption rate may be computed as follows:
This is also called as ‘multiple overhead absorption rate’. If all jobs don’t spend approximately the same time in each department then, to ensure that all jobs are charged with their fair share of overheads, it is essential to establish separate overhead rates for each department. The application of multiple overhead absorption rates depend on two factors viz., the degree of accuracy desired and the clerical cost involved.
Predetermined Absorption Rates:
In practice, actual overhead costs are not always readily available for application since the total figure of overhead cost incurred during the period will be ascertained only at the end of the accounting period and application of actual overhead absorption is not possible.
To overcome the difficulty a predetermined overhead absorption rate is calculated at the beginning of the accounting period and is applied to the completed units during the period.
The major objective of using predetermined absorption rate is to recover the overhead as soon as the product has been completed, to arrive at the product cost. It is calculated with the budgeted figures of the forthcoming accounting period basing on the expected level of activity.