Pre-determined overhead absorption rates.ppt

Pre-determined overhead absorption rates Why need the pre-determined overhead absorption rates More convenient Need prices to be quoted before order are obtained Formulae Absorption into production Formulae Overhead Actual Activity ×Predetermined absorbed= (eg labour hrs) OAR End of the year Overhead Absorbed ≠ Actual Overhead Reason: 1.Actual expenditure was more or less than budget (expenditure variance) 2.Actual units produced (volume) were more or less than budget (volume variance) Over or under absorption Actual overhead X Overhead absorbed (X) Under/(over) absorption X/(X) Under absorption ----actualabsorbed Over absorption ----absorbedactual Example There has a factory. The budgeted production overhead is 84,000 pounds. And the budgeted machine hours are 7,000 hours. Therefore, Pre-determined production overhead rate is: 84,000 pounds / 7,000 hours = 12 pounds per hour The actual production overhead are 81,600 pounds. And the actual machine hours are 6,300 hours. Therefore, the absorbed production overhead is 6,300×12 = 75,600 pounds. 81,600－75,600 = 6,000 There is 6,000 pounds under absorbed Expenditure and volume variance (a) Expenditure variance Actual expenditure on fixed overheads X Budgeted expenditure on fixed overheads (X) Expenditure variance X Expenditure and volume variance (b) Volume variance units Actual volume of production X Budgeted volume of production (X) Difference X Valued at OAR/unit X The use of pre-determined overhead absorption rates give rise to under or over absorptions, which are usually written off to the profit and loss account. Chapter 9 Formulae summary Pre determined overhead absorption rate (OAR)= budgeted overhead budgeted activity overhead abso