All About Costing

Calculation of Absorption Rate:

Production Overhead is absorbed on the bases of percentage of direct labor.

Calculation of Rate of Production Overhead= (Total Production Overhead/ Total Direct Labor Cost)*100
Suppose,
We have Total Production Overhead is Rs. 7000 and Total Direct Labor Cost is Rs. 7000 then,
Apply the above formula and we get the absorption rate,

                                                                 (7000/7000)*100
                                                                = 100%
Production Overhead is 100% of Direct Labor
Now cosider the previous exemple and apply the rate on that labor cost

Process I = Rs. 2200*100%
               = Rs. 2200

Process II = .Rs. 3500*100%
                =  Rs 3500

Process III = Rs. 1500*100%
                  = Rs. 1500