Question

Which method of absorption of factory overheads do you suggest in a concern which produces only one uniform time of product

Answer 1

The amount absorbed in cost accounts may not be equal to actual overhead relating to an accounting period. The use of a predetermined rate may, therefore, result in under-absorption or over-absorption. When the amount absorbed is less than the actual overhead, there is under-absorption.

Answer 2

• Method of absorption of factory overheads in a concern that produces only one uniform time of the product is called a rate per unit of output or Average cost method.

• The total cost of production divided by the number of units manufactured is the average cost per unit of production.

• The unit cost is another name for it. Average cost normalises the cost per unit of output across time, particularly over the long term.