Sir, In absorption costing we distribute expenses related to power from machine horse power rate only or from machine horse power rate x machine hours rate ? Which overhead will be apply or it is compulsory to apply any one absorption or we can apply any of the absorption?
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In absorption costing, overhead expenses are allocated to the products based on a predetermined rate that includes both variable and fixed overhead costs. The predetermined overhead rate is calculated by dividing the total overhead costs by an allocation base, which could be machine hours, direct labor hours, or units produced. Regarding the distribution of expenses related to power, the overhead rate could be based on machine horsepower rate only or machine horsepower rate multiplied by machine hours rate. The choice of allocation base depends on the nature of the business and the production process. For example, if the power consumption is directly proportional to the number of machine hours, then it would be appropriate to use machine horsepower rate multiplied by machine hours rate.