Explain briefly various methods of absorption of factory overheads.
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Explain briefly various methods of absorption of factory overheads.
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Absorption of factory overheads is a crucial accounting process used to allocate indirect production costs to products or services It ensures that these overhead costs are included in the cost of goods sold and ultimately in the pricing of products or services Various methods are employed to absorb factory overheads and here are some of the most common ones Direct Labor Hours or Direct Labor Cost Method This method allocates overhead costs based on the number of direct labor hours worked or the total direct labor cost incurred It assumes that there is a direct correlation between labor activity and overhead expenses Therefore products with higher labor hours or costs will absorb more overhead Machine Hours Method Under this approach factory overheads are allocated based on the number of machine hours utilized by each product or department It assumes that machine usage is a significant driver of overhead costs Products that require more machine time will bear a higher share of the overhead costs Production Volume or Units Produced Method This method allocates overhead costs based on the number of units produced It assumes that the ...View the full answer
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