As Per The New Syllabus Prescribed by The Savitribai Phule Pune

AS PER THE NEW SYLLABUS PRESCRIBED BY THE SAVITRIBAI PHULE PUNE
UNIVERSITY,PUNE FOR T.Y.B.COM EFFECTIVE FROM JUNE,2015
COST AND WORKS ACCOUNTING

(Overheads and Methods of Costing-II)
T.Y.B.COM
 DR. SANJAY L. ARGADE

ASSOCIATE PROFESSOR
Department of Commerce
K. J. Somaiya College of Arts, Commerce and Science, Kopargaon
 Types of Overhead Rates
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INTRODUCTION:
Overheads are absorbed on the basis of absorption rates. Overhead absorption

rates are determined for the purpose of absorption of overheads in costs of job,
process or products. There are several methods of determination of overhead
absorption rates. The basic procedure followed in these methods is to divide the
amount of overheads by the total number of units of the base selected. The base
may be units of products, direct labour cost, labour hours, machine hours or
direct material cost. The rate so determined is multiplied by the units of the base
in each individual product or job to decide cost of the each unit.
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The following formula may be used to calculate the overhead absorption rate:
Amount of Overheads Absorbed
Overhead Absorption Rate =
Quantity or Value of Base
Amount of overhead absorbed in a product = Units of the base × Overhead Rate
Basic Objectives of fixation of overhead rates:
1. To facilitate absorption of overhead to cost units on a logical basis.

2. To estimate overheads cost in advance of production.
3. To even out the fluctuations in the overhead rates.
4. To facilitate quick computation of cost on completion of production.
5. To help in prompt calculation of cost of work-in-progress.
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TYPES OF OVERHEAD RATES:
The important types of overhead rates are as follows:
1. Actual Rate:
Actual rate is determined by dividing actual overheads incurred during the

accounting period by actual quantity or value of the base selected. Actual Overhead
Absorption Rate is calculated as follows:
Actual overhead expense incurred during a certain period

Actual Rate =
Actual quantity or value of the base selected to production during a certain period
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As far as possible, recovery of overheads should be done on actual basis. However, in
practice it is not possible due to the following reasons:
1. Actual rate can be determined only after the accounting period is over. This may
delay determination of cost.
2. The incidence of same of the overhead expenses is not uniformly spread
over all the accounting periods. Similarly, actual volume of activity is affected by
seasonal and cycle factors.
3. Actual rates do not provide any basis for cost control.
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2. Pre-determined Rate:
Pre-determined rate is determined on the basis of budgeted overheads and the

budgeted base is for the period. Pre-determined overhead absorption rate is calculated
as follows:
Budgeted verheads for the period
Pre-determined Rate =
Budgeted base for the period
Pre-determined rate facilitates computation of cost in advance. This helps in

preparation of bills promptly. No extra clerical work is involved in determination of
overhead rate in an organisation where budgetary control system is adopted.
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3. Blanket Rate:
Blanket rate is the single or general overhead rate applicable to the whole factory.
Blanket overhead absorption rate is calculated as follows:
Overhead cost for the entire factory

Blanket Rate =
Total quantum of the base selected
Blanket rate is suitable in those factories where only one major product is
manufactured in a continuous process. It is also suitable where the work performed
by every department is fairly uniform.
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4. Multiple Rate:
Multiple rate is also known as ‘Departmental Overhead Rate’. These are the
rates for different departments in the factory. A separate rate is determined for
each department. Multiple overhead absorption rate is calculated as follows:
Overhead costs allocated and apportioned to each

departments cost centre or product
Multiple Rate =
Corresponding base
Multiple rates are applied where the product lines are varied, or machinery is
used to a varying degree in different departments, i. e. the conditions in in the
factory are not uniform.
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Thank You
4/12/2020 9

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AS PER THE NEW SYLLABUS PRESCRIBED BY THE SAVITRIBAI PHULE PUNE

UNIVERSITY,PUNE FOR T.Y.B.COM EFFECTIVE FROM JUNE,2015

COST AND WORKS ACCOUNTING

 DR. SANJAY L. ARGADE

 Types of Overhead Rates

Overheads are absorbed on the basis of absorption rates. Overhead absorption

Amount of overhead absorbed in a product = Units of the base × Overhead Rate

Basic Objectives of fixation of overhead rates:

1. To facilitate absorption of overhead to cost units on a logical basis.

Actual rate is determined by dividing actual overheads incurred during the

Actual overhead expense incurred during a certain period

Pre-determined rate is determined on the basis of budgeted overheads and the

Pre-determined rate facilitates computation of cost in advance. This helps in

Overhead cost for the entire factory

Overhead costs allocated and apportioned to each

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