Overhead absorption rates
The totals of the overhead analysis give the rates: material and production on direct costs, administration and selling on production cost.
Worked example
After the overhead analysis these totals are known. There are no changes in stock. Work out the four overhead rates (2 decimal places).
| Item | Amount |
|---|---|
| Direct materials | £223,000.00 |
| Direct labour | £69,000.00 |
| Material overheads | £40,140.00 |
| Production overheads | £58,650.00 |
| Administration overheads | £42,986.90 |
| Selling overheads | £37,125.05 |
Worked solution
- 1.Material rate = £40,140.00 / £223,000.00 × 100 = 18.00%
- 2.Production rate = £58,650.00 / £69,000.00 × 100 = 85.00%
- 3.Production cost = £223,000.00 + £40,140.00 + £69,000.00 + £58,650.00 = £390,790.00
- 4.Administration rate = £42,986.90 / £390,790.00 × 100 = 11.00%; selling rate = £37,125.05 / £390,790.00 × 100 = 9.50%
Typical mistake: Basing the administration and selling rates on direct costs instead of production cost.
Your turn
Three problems of exactly this type, each time with new numbers. Amounts with or without thousands separators.
Task
After the overhead analysis these totals are known. There are no changes in stock. Work out the four overhead rates (2 decimal places).
| Item | Amount |
|---|---|
| Direct materials | £165,000.00 |
| Direct labour | £178,000.00 |
| Material overheads | £39,600.00 |
| Production overheads | £391,600.00 |
| Administration overheads | £58,065.00 |
| Selling overheads | £73,549.00 |
Material overhead rate in %
Production overhead rate in %
Administration overhead rate in %
Selling overhead rate in %
Amounts like 12,500 or 12500.50; percentages as a number (12.5). Round to the penny or 2 decimal places.
Formulas for this topic
- Allocate overheads by a fair basis (area, staff, kWh …)
- Reapportion service centres by the service they provide
- Material rate = material overhead / direct materials × 100
- Administration and selling rates = overhead / production cost × 100
Typical mistake: Basing the administration and selling rates on direct costs instead of production cost.
Frequently asked questions
What is the typical mistake in "Overhead absorption rates"?
Basing the administration and selling rates on direct costs instead of production cost.
What is a service cost centre?
A centre such as the vehicle fleet or canteen that works for other centres; its costs are passed on to them.