Methods of absorption

Methods of  Absorption:--

After allocation and apportionment of overheads to their departments, we have to include it in the cost of production. The process of this is called absorption of overheads. For calculating the total cost of production, overhead is its main part. For including overhead in each unit of production, we have to study the methods of overhead absorption.

Following are the main methods of Overhead Absorption


1. Direct Material Cost Method 

According to the material cost method, we calculate the rate of overhead on the basis of past actual direct material and past actual overheads. For example, past actual direct material's cost is Rs. 10,000 and past actual overhead cost is Rs. 2000. So, Overhead rate will be 20%. If we have obtained any specific order for producing any product, we will include the 20% cost of overhead. For example, we have produced one unit for our customer for this, we have used our Rs. 1000 material. Our overhead cost in it will be Rs. 1000 X 20% = Rs. 200. We this, we need not to go to deep study of calculating each overhead like electricity consumption in this one unit, depreciation for this one unit, salary cost for this one unit and other overhead cost for producing this one unit. Ok.

2. Direct Labour Cost Method 

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