Overhead calculation formulas;

Overhead calculation formulas;

What is the absorption rate of overhead in industrial accounting?

After forecasting the factory overhead, this overhead is recognized until the end of the financial period and is the basis for calculating the cost of production, which is called the overhead absorption rate.

Formula:
Overhead absorption rate = estimated overhead cost/estimated basis

The following factors are used to determine the absorption rate of overhead in industrial accounting

Estimated overhead (budgeted)

Basis for absorption of construction overhead costs

Selected activity level

What are the basics of absorption of construction overhead?

The production level can be expressed in terms of each of the factory overhead absorption bases. The basics of factory overhead absorption are as follows:

Cost of direct materials: There is usually no logical relationship between the cost of direct materials and factory overhead costs, so it is not a suitable basis for absorbing factory overhead costs.

Direct labor cost: Using this basis is used when there is a relationship between direct labor cost and factory overhead costs and the rates of direct labor per hour in each circle are almost equal.

Direct labor hours: This basis can be used when there is a direct relationship between direct labor hours and factory overhead costs.

Working hours of machines: if the factory machines are fully automatic, the working hours of the machine is the most suitable basis for absorbing overhead costs. Because some factory overhead costs such as maintenance and depreciation are directly related to machine working hours.

Actual Overhead: Expenses actually incurred during the financial period. Also, all the costs that should be identified as overhead costs by making reforms at the end of the financial period and registered in the relevant accounts.
Mehdi Koh Soltani (financial services, accounting, financial and tax consultant):
The group of accountants and auditors of Tabriz
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This post is written by Mahdi_kohsoltani