Actual » Incurred

This pertains to the actual data is obtained • Actual Activity This is the activity that is actually achieved during the production period or process. It may be measured in terms of output, input, labor/labour time worked, machine hours worked, etc. The two most common measures of activity that we deal with in analysing overhead variances are » Actual Output The output that has actually been achieved over the production period or process. » Actual Time The time for which the production process is actually carried on over the production period or process. • Actual (Overhead) Cost » Incurred (Overhead) Expenditure This is the actual overhead expenditure/cost incurred. This can be ascertained only after the incurrence of the cost i.e. at the end of the period or process in consideration. The total overhead incurred is segregated into Variable Overhead Expenditure/Cost Fixed Overhead Expenditure/Cost Semi-Variable Overhead Expenditure/Cost • Where there are Semi-Variable Costs If semi-variable overheads form a part of the total overhead cost/expenditure, it is segregated into two One a fixed part and the other a variable part. Since there are no tools to analyse semi-variable overheads separately, we add up the fixed part of the expense to Fixed Overhead Cost and the variable part of the expense to the Variable Overhead Cost respectively, for the purpose of variance analysis. Therefore, Fixed Overhead Cost/Expenditure Incurred       = Fixed Overhead Cost/Expenditure + Fixed part in semi-variable overhead Cost/Expenditure Total Variable Overhead Cost/Expenditure Incurred       = Variable Overhead Cost/Expenditure + Variable part in semi-variable overhead Cost/Expenditure The actual overhead cost/expenditure incurred would be interpreted as Variable Overhead cost/expenditure incurred for analysing "Variable Overhead Variances" Fixed Overhead cost/expenditure incurred for analysing "Fixed Overhead Variances" Total Overhead cost/expenditure incurred for analysing "Total Overhead Variances"

Absorbed Overhead

Absorbed overhead is the amount of overhead cost that is absorbed into total cost based on the predetermined rates of absorption of overheads. The overhead absorbed is always dependent on the actual activity. Where the overheads are being absorbed on a unit basis, the amount of overhead absorbed is dependent on the actual number of units produced. Overhead Absorbed = Actual Units Produced × Rate of Overhead Absorption (per unit) Where the overheads are being absorbed on a per hour basis, the amount of overhead absorbed is dependent on the actual number of hours worked for producing the output. Overhead Absorbed = Actual time (No. of hours) worked × Overhead Absorption Rate (per hour) The overhead cost/expenditure absorbed would be interpreted as Absorbed Variable Overhead cost/expenditure for analysing "Variable Overhead Variances" Absorbed Fixed Overhead cost/expenditure for analysing "Fixed Overhead Variances" Absorbed Total Overhead cost/expenditure for analysing "Total Overhead Variances" There are other basis also for absorbing overheads. Since only the per unit and per hour basis are used extensively, we limit the discussion to these two bases only.

Finding absorbed overhead using a basis other than that used for absorption

The basis for absorption of overheads is something that is decided upon by the organisation based on a number of factors. Therefore, to know the amount of overhead absorbed we should know the basis of absorption that had been adopted. This implies that Where overheads have been absorbed on per unit basis,       Absorbed Overhead = Actual Units Produced × Rate of Overhead Absorption (per unit) Where overheads have been absorbed on per hour basis,       Absorbed Overhead = Actual time (No. of hours) worked × Overhead Absorption Rate (per hour) If we use a basis different from the one that had been used for absorbing overheads, the figure of absorbed overhead that we arrive at would be erroneous. However, there is a possibility to find the overhead absorbed using the per hour basis when they are absorbed on per unit basis and vice versa. Thus, Where overheads have been absorbed on per unit basis, Overhead Absorbed = Actual Units produced × Overhead Absorption Rate/unit (Or) = Standard Time (in hrs) for Actual Output × Overhead Rate/hour Where overheads have been absorbed on per unit time (hour) basis, Overhead Absorbed = Actual Time (in hrs) × Overhead Absorption Rate/hour (Or) = Standard Output for Actual Time × Overhead Absorption Rate/unit

Illustration » Problem + Working Notes

Consider the following data relating to a production process for a period. Budget Actual Cost Rs. 5,00,000 Rs. 5,40,000 Output 50,000 units 52,000 units Time 5,00,000 hours 5,80,000 hours • Working Notes » Budgeted Rate per unit = Budgeted Overhead Cost Budgeted Output = Rs. 5,00,000 50,000 units = Rs. 10/unit » Budgeted Rate per hour = Budgeted Overhead Cost Budgeted hours = Rs. 5,00,000 5,00,000 hrs = Rs. 1/hr

Illustration » Solution (Overheads Absorbed On per unit basis)

Calculating absorbed overhead based on » Unit Rate Overhead Absorbed = Actual Units produced × Overhead Rate/unit = 52,000 units × Rs. 10/unit = Rs. 5,20,000 » Unit (time) hourly Rate Standard Time for actual output = Actual Output Budgeted Output × Budgeted Time = 52,000 units 50,000 units × 5,00,000 hours = 5,20,000 hours Overhead Absorbed = Standard Time (in hrs) for Actual Output × Overhead Rate/hour = 5,20,000 hours × Rs. 1/hour = Rs. 5,20,000

Illustration » Solution (Overheads Absorbed On per hour basis)

Calculating absorbed overhead based on » Unit (time) hourly Rate Overhead Absorbed = Actual Time produced × Overhead Rate/hour = 5,80,000 hours × Rs. 1/hour = Rs. 5,80,000 » Unit Rate Standard Output for actual Time = Actual Time Budgeted Time × Budgeted Output = 5,80,000 hours 5,00,000 hours × 50,000 units = 58,000 units Overhead Absorbed = Standard Output for Actual Time × Overhead Rate/unit = 58,000 units × Rs. 10/unit = Rs. 5,80,000

Author Credit : The Edifier

... Continued Page O:5