Question 57 of 67
Q.Explain any two methods of absorption of production overhead.
ChseodishaCHSE Odisha Plus Two (Class 12) Commerce Board 2023Subjective· 8mImportance★★★★★est
85% · 57/67 Questions
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Start your 14-day free trial to unlock the full solution →Percentage-of-direct-wages and machine-hour-rate are two standard overhead-absorption methods.
Absorption of overhead means charging the production overhead of a cost centre to the cost units (jobs/products) passing through it, using a predetermined overhead rate. Two widely used methods:
1. Percentage of Direct Wages method
- Overhead rate = (Production overhead ÷ Direct wages) × 100.
- The resulting percentage is applied to each job's direct wages to absorb overhead.
- Merits: simple, easy to apply where wage rates are uniform.
- Demerit: it ignores the time factor and the use of machinery — a job using costly machinery but low wages is under-charged.
- Example: Overhead Rs.20,000, direct wages Rs.40,000 → rate = 50% of wages; a job with wages of Rs.600 absorbs Rs.300 overhead.
2. Machine Hour Rate method
- Machine hour rate = Production overhead ÷ Machine hours worked.
- Overhead is charged to a job by the number of machine hours it uses.
- Merits: most suitable where work is largely done by machines; it recognises the time each job occupies the machine and gives an accurate recovery.
- Demerit: needs detailed records of machine hours; less useful where work is mainly manual. …
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