Write short notes on Absorption of overheads.
Answers
Overhead absorption is a process by which overheads are included in the total cost of a product. According to Terminology of Cost Accountancy overhead absorption is defined as “the charging overheads to cost units by means of rates separately calculated for each cost centre. In most cases the rates are pre-determined”.
When dissimilar products are made which require different production processes or for jobs using identical facilities, overhead absorption becomes very much essential.
The overhead to be absorbed by a cost unit is computed with reference to two factors:
(i) The overheads attributable to a given cost centre; and
(ii) The number of units of the absorption base i.e. labour hours, machine hours etc.
Absorption of overheads refers to charging of overheads to individual products or jobs. It is a process of distribution of overheads allotted to a particular department or cost centre over the units produced. The absorption of overhead is done by applying overhead absorption rates.