Costing Machine Hour Rate

INTRODUCTION
The life and death of most manufacturing concerns depends to a large extent on their cost
systems, how well they perform their duties and how the facts they bring out are made use of. It
is, of course, self-evident, that factories are run for the purpose of earning money, and if they
don't do it, they cannot remain in "business very long. To earn money, the goods which are
produced by the factory must be sold for more than they cost, hence to know the selling price,
the cost must be known. The accuracy with which the selling price is fixed is a direct function of
the accuracy of the costs, except in the case of certain monopolies and patented articles, and even
in the latter cases, to know what the earnings are, the costs must be known. Thus it will be seen
that factory costs are very important, and are among the principal items which must be closely
watched by the management.
The work of the engineer, especiallythe one who is connected with factory work, is constantly
broadening, and embracing more of the field of management. To be sure, there are many who
will confine their work to purely professional lines, but industrial management requiresthe
trained mind of the engineer,applied to management and business problems almost as much as to
technical problems. One ofthe principal things with whichthe engineermust be at least somewhat
familiar is factoryand construction costs.
1.1 NEED FORTHE STUDY
In factories or departments, where production is largely by machinery, this method gives greater
accuracy than any of the other methods. The terminology defines a machine hour rate as “a rate
calculated by dividing the budgeted or estimated overhead or labor and overhead cost
attributable to a machine or group of similar machines by the appropriate number of machine
hours. The hours may be the number of hours for which the machine or group is expected to be
operated, the number of hours which would relate to normal working for the factory, or full
capacity”. In a highly mechanized cost center, majority of the overhead expenses are incurred on
8
account of using the machine, such as, depreciation, power, repairs and maintenance, insurance,
etc. Machine hour rate, therefore, provides the most equitable basis for absorption of overheads
in machine intensive cost centers.
1.2 OBJECTIVES OF THE STUDY
Primary Objective
 To analyze the Machine Hour Rate
Secondary Objective
 To classify overheads and observe the absorption of overheads

 To identify absorption rates and find the cost of production for the future

 To compute the costs of overheads and reduce its expenses in upcoming financial years.
1.3 ADVANTAGES OF MACHINE HOUR RATE ANALYSIS
1) It helps to measure the relative efficiency of different machines.

2) It facilitates comparison of cost of operating different machines.
3) It helps to ascertain idle time of machines relating to non-productive time.
4) It is the most desirable scientific method, where the time factor is taken into account.
COMPUTATION OF MACHINE HOUR RATE
The overhead expenses are to be departmentalized first. Then, each machine or a group of
machines within the department shall be treated as a cost centre, and all the items of expenses are
allocated to the machine cost centers on some suitable basis. Machine hour rate is then computed
by dividing the total overhead for the machine cost centre by the anticipated machine hours.
Machine hour rate can be bifurcated into variable or running expenses and standing or fixed
expenses in order to differentiate between expenses being incurred while running the machine
compared to when it remains idle. For example, power, oil, grease and cotton waste, repairs and
maintenance expenses are running or variable, while depreciation, rent and taxes, lighting and
heating, insurance and supervision are included understanding or fixed charges. Lastly, a
9
machine hour rate may include the wages of the machine operator and attendance, if they
become part of the complements.
The machine hour rate is then determined by dividing the amount of overhead cost to be
apportioned or absorbed by the number of machine hours.
2.1 Steps for computing the Machine Hour Rate:
The following steps are required for computing the machine hour rate:
 Identify the overhead expenses relating to a specific machine or group of machine in order to
require for computing machine hour rate.

 Each machine or group of machine treated as a cost centre.

 Manufacturing overhead or machine expenses are grouped into two types:

a) Fixed or Standing Charges
b) Variable Machine Expenses.
a) Fixed or Standing Charges : Fixed or Standing Charges which remain constant irrespective of
the use of machine. For example, rent, insurance charges, rates, supervision etc.
b) Variable Machine Expenses : These expenses are variable with use of the machine. For
example, power, depreciation repairs etc.
 An hourly rate of fixed or standing charges will be calculated by totaling of fixed charges and
dividing by the number of normal hours worked by machine.

 Normal working hours are calculated by adding the cost relating to non-productive time i.e.
normal ideal time for maintenance and setting up etc.

 Separate hourly rate for each machine expenses will be calculated.

 The total of the standing charges rate and machine expenses rates per hour will give the
machine hour rate.
2.2OVERHEADS
Overhead is the aggregate of indirect material, indirect labor and indirect expenses. It refers to
any cost which is not directly attributable to a cost unit. The term ‘indirect’ means that which
cannot be allocated, but which can be apportioned to or absorbed by cost centers or cost units.
10
Overhead cost is, therefore, a group of expenses, which are not identifiable with the cost unit, but
are incurred generally for the manufacturing and selling activities of the organization and can be
apportioned to and absorbed by the cost units. It is a distinct element of cost, and needs different
treatment in accounting and control compared to direct cost elements. Further. With automation
and introduction of new technology, manufacturing activities are increasingly depending on
machineries rather than human efforts. As a result, overhead expenses are increasing
continuously.
2.2.1 Importance of accounting overheads
Accounting of Overheads is one of the most important & technical aspect of Cost accounting.
From Cost reduction & Cost control point of view, overhead play a great role. So, proper
understanding of computation and accounting of overhead is must.
In a modern unit, overheads could be as high as material cost. That is why proper and effective
accounting and control of overheads is so much needed today. For proper accounting and
effective control, overhead expenses are classified into a number of suitable account heads for
each type of expenditure. Similar expenses are then grouped under a major account head. Such
account headings are given code numbers, which could either be alphabetical or numerical or a
combination of both. However, for the purpose of mechanized accounting or computerization,
numerical coding structure is more useful.
2.3DISTRIBUTION OF OVERHEADS
Step 1 -Classification of Overheads
Step 2 -Collection of Overheads
Step 3 - Allocation of Overheads
Step 4 -Apportionment of Overheads
Step 5 -Re-apportionment of service department
Overheads
Step 6 - Absorption of Overheads
11
2.3.1 CLASSIFICATION OF OVERHEADS
The machine rate is usually, but not always, divided into fixed costs, operating costs, and labor
costs. For certain cash flow analyses only items which represent a cash flow are included.
Certain fixed costs, including depreciation and sometimes interest charges, are omitted if they do
not represent a cash payment. For some analyses, labor costs are not included in the machine
rate. Instead, fixed and operating costs are calculated. Labor costs are then added separately. This
is sometimes done in situations where the labor associated with the equipment works a different
number of hours from the equipment.
Overhead, in fact, consists of two parts. One, relating to the product, and the other relating to the
facilities and services maintained for the running of the organization. While the former is
incurred when production is carried on (by way of indirect material labor and expenses), the
latter is incurred even when production is not undertaken. The expenses incurred for maintaining
a factory shed, office building, stores, machine shop, canteen, dispensary, generation room,
boiler, etc. are all included in overheads as such facilities are required to keep the unit in
readiness for production activities. By themselves, these services have no use. Similarly,
expenses incurred for administration of manufacturing and selling and distribution of products
are included in overheads. If selling and distribution are undertaken by the organization, then a
sizeable amount of the expenses enter into overheads, since only a small portion of the expenses
incurred can be identified as direct cost of the product.
• Production • Fixed Indirect

Overheads Overheads materials
• Distribution • Variable • Indirect

Overheads Overheads Labor
• Selling • Indirect
Overheads Expenses
•Administrative
Overheads
12
Fixed Costs
Fixed costs are those which can be predetermined as accumulating with the passage of time,
rather than with the rate of work. They do not stop when the work stops and must be spread over
the hours of work during the year. Commonly included in fixed costs are equipment
depreciation, interest on investment, taxes, and storage, and insurance.
Operating Costs
Operating costs vary directly with the rate of work. These costs include the costs of fuel,
lubricants, tires, equipment maintenance and repairs.
Labor Costs
Labor costs are those costs associated with employing labor including direct wages, food
contributions, transport, and social costs, including payments for health and retirement. The cost
of supervision may also be spread over the labor costs.
2.3.2 COLLECTION OF OVERHEADS
Collection of overheads means the collection ofvarious items of overheads under suitable
accountheading and a unique Standing Order Number (S.O.N.) or Cost Account Number
(C.A.N.).
For proper accounting and effective control, overhead expenses are classified into a number of
suitable account heads for each type of expenditure. Similar expenses are then grouped under a
major account head. Such account headings are given code numbers, which could either be
alphabetical or numerical or a combination of both. However, for the purpose of mechanized
accounting or computerization, numerical coding structure is more useful. For collection of
overhead expenses, it is necessary to relate each item of expense to the cost centre where the
expense has been incurred. Therefore, code numbers should be allotted to cost centers also with
division into major, minor and detail heading. Expense code numbers allotted to factory
13
overheads are known as ‘Standing Order Numbers’, whereas those allotted to administration,
selling and distribution expenses are termed as ‘Cost Account Numbers’. The method of
compilation is, however, same for both types of code numbers. While preparing code structure, it
should be borne in mind that
 Each code should be clearly defined, leaving no room for confusion or ambiguity, and

 The structure should be flexible enough for inclusion of items in future.
The allocation of code numbers can be done in a number of ways, using alphabetic or numerical
methods. Each organization will have its own method depending on the needs of the accounting
system.
Documents for Collection of Overheads
The main sources from which overhead expenses are collected are as follows — (i) Stores
requisition, (ii) Invoices, (iii) Cash book, (iv) Wages analysis, (v) Other registers and reports,
(vi) Journal entries.
 Stores requisition. Indirect materials like soap, oil, cotton waste, grease, brushes,
brooms, etc. are issued from stores on the basis of stores requisition notes which are
priced and charged to the cost centre which used them.

 Invoices. Invoices for material and services are entered in purchase journal with proper
accounts code and cost centre codes before making payments. Purchase Journal, if
manually maintained, contains separate columns for materials and overhead expenses
along with advance payment and accrued charges.

 Cash book. Where cash transactions occur for the procurement of material and services,
cash book is analyzed and indirect expenses are collected under account code and cost
centre code wise.

 Wages analysis book. Wages analysis indicates overheads control accounts to which
salaries and wages are to be booked.

 Other registers and reports. For collection of depreciation amount, plant or fixed assets
register has to be scrutinized. Similarly, for scrap, waste and spoiled work or idle
facilities, relevant reports have to be referred.
14
 Journal entries. Monthly apportionments from payments in advance like insurance and
tax, accruals for unpaid salaries and wages or rent, notional charges for rent, interest, etc.
are all collected from Journal entries.
2.3.3ALLOCATION OF OVERHEADS
Overheads are common costs incurred for the benefits of a number of costs centers or cost units.
Therefore, they cannot be identified and allocated directly to a particular unit of output. As such,
they are to be allocated among the units of output of a particular department or a number
ofdepartments or cost centers.
Allocation of overheads is the process of charging overhead costs to a particular department or

cost center. It is the allotment or assignment of an overhead cost to a particular cost unit. If the
overhead cost is associated with a single department or cost center, the whole amount is charged
or distributed among the units of output of that particular department. For example, the whole
amount of repair and maintenance expenses for a machine is charged or allocated to that
department where the machine has been installed.
ITEMS OF
PRODUCTION SERVICE
OVERHEADS
DEPARTMENTS DEPARTMENTS
ALLOCATED
P1 P2 S1 S2
Direct
Materials
Direct Wages
Direct
Expenses
Direct Material
Indirect Wages
TOTAL
OVERHEADS
ALLOCATED
15
2.3.4 APPORTIONMENT OF OVERHEADS
Distribution of an overhead cost to several departments or cost centers is known as

apportionment of overheads. It is the process of charging or apportioning costs to a number of
cost centers or cost units. If a given cost is common to two or more departments or cost centers,
such cost should be apportioned or divided among these departments on an equitable basis. For
example, the amount of factory rent should be apportioned to all the departments. Similarly, the
amount of remuneration of the general manager should be distributed to the production,
administration and marketing departments as the general manager is associated with all these
departments.
Principles for Apportionment of Overheads

(a) Actual Benefit
(b) Potential Benefit
(c) Ability to pay
(d) Specific Criteria/Survey method
Basis of Apportionment
COMMON ITEMS OF PRODUCTION OVERHEADS BASIS OF APPORTIONMENT
(a) Factory rent, rates & taxes
Floor area occupied
(b) Insurance of factory building
(a) Insurance of Plant & Machinery

Capital Cost of Plant & Machinery
(b) Depreciation of Plant & Machinery
Insured Value of stock

(a) Insurance of Stock
(a) Supervision
No. of workers
(b) Canteen Staff Welfare Expenses
(a) Compensation to Workers Wages

(b) PF Contribution
Value of direct materials
(a) Stores Overheads/keeping expenses
Weight of direct Materials
(a) Material Handling Charges
16
2.3.5 ABSORPTION OF OVERHEADS
Charging of overheads to specific product is known as absorption. Overhead absorption is also known as
application of overheads. In other words, absorption refers to charging of overheads of a department to
different cost units in a way that each cost unit bears an appropriate portion of its share of overheads.
Absorption of overheads is done by using Raw material consumed, wages, prime cost, units produced,
labor hours and machine hours.
Methods of Absorption of Overhead
There are number of methods applicable for computing overhead absorption rate. The following are
the various methods of absorbing “Manufacturing Overhead” depending upon the suitable basis selected
for the purpose
 Direct Material Cost Method

 Direct Labor Cost Method

 Direct Labor Hours Method

 Prime Cost Method

 Unit of Output Method

 Machine Hour Rate Method
Stage III:-Analyzing the Information
The next step in the research process is to extract pertinent information and findings from the data. We
have attempted to apply techniques in the analytical research system in the hope of discovering
additional information.
Stage IV: - Presenting the findings
The next step in this process is to find out the useful and fruitful information from the dataor the
analytical work done. The researcher should present major findings that are relevantto the major
financial decision facing management. The study is useful when it reduces the amount of uncertainty
facing the financial executive.
5.4 PERIOD OF STUDY
The period of the study at the Supreme Industries Limited, Pondicherry is for 45 days
DATA ANALYSIS AND INTERPRETATION
6.1 Machine hour rate calculation for machine from the period of( July 2012 to May 2013)
Machine Rate Calculation(July 12)
Plant A
machine name: IT 1200 A
machine worth : 21677206.03
additional cost inquired for installation: 15000
working life of machine(in hours): 1,000,000-2,000,000 cycles
OR (100-200 YEARS)
diesel used (per hour) 150 liter
Supervisors devote for the machine: 8 8HRS.
Cost of the power per 100 units: 5.50 per unit
power consumed per hour: 1458
Normal working hour of machine: 24 HRS.
Actually worked hour: 22 HRS.
Calculation of overhead costs:
Expenses: Per hour Per month
Fixed Expenses:
Rent & rates 46.8 13479.452
Supervisors salary and labor cost 3721.23 1071715
Insurance 92.8 26728.76
Taxes 42.57 12263
Interest 2631.05 757742.4
Depreciation(machine cost+additional cost 3678.76 1059484.9
-scrap)
Variable Expenses:
Repairs & Maintenance 425.3 306258
Power & fuel 242.4 4190001.54
Total 10880.91 7437673.052

Machine hour rate or predetermined
overhead rate:
operation(1 YEAR)
overhead costs/total no of hours the 494.5868182 11269.20152
machine is in operation
33
Machine Rate Calculation(Aug 2012)
Plant A
OR (100-200 YEARS)
DIESAL used (1 HOUR) 150 LITER

Supervisors devote for the machine: 8HRS.
Expenses: per hour per month

Fixed Expenses:
Rent & rates 18.72 13479.452
Supervisors salary and labor cost 1488 1071715
Insurance 37.1 26728.76
Taxes 17.03 12263
Interest 1052 757742.4
Depreciation(machine cost+additional cost -scrap) 1471 1059484.9
Variable Expenses:
Repairs & Maintenance 342 246279.4
Power and fuel 6697 4822034.51
Total 11122.85 8009727.422
Machine hour rate or predetermined overhead

rate:
operation(1 YEAR)
overhead costs/total no of hours the machine is in 505.5818182 12135.95

operation
34
Machine Rate Calculation(Sep 12)
Plant A

OR (100-200 YEARS)
Diesel used (per hour) 150 LITER
Supervisors devote for the machine: 8 8HRS.


Fixed Expenses:
Rent & rates 46.8 13479.452
Insurance 92.8 26728.76
Taxes 42.57 12263
Interest 2631.05 757742.4
Depreciation(machine cost+additional cost -scrap) 3678.76 1059484.9
Variable Expenses:
Power & fuel 7869.4 5666000
Total 18507.91 8913671.512
Machine hour rate or predetermined overhead rate:

operation(1 YEAR)
operation
35
Machine Rate Calculation(Oct 12)
Plant A
OR (100-200 YEARS)
Supervisors devote for the machine: 8 HRS.

Fixed Expenses:
Rent & rates 46.8 13479.452
Insurance 92.8 26728.76
Taxes 42.57 12263
Interest 2631.05 757742.4
Depreciation(machine cost+additional 3678.76 1059484.9
cost -scrap)
Variable Expenses:
Power & fuel 6866 4943999.61
Total 17504.51 8191671.122

operation(1 YEAR)
36
Machine Rate Calculation(Nov 12)
Plant A

OR (100-200 YEARS)

Normal working hour of machine: 24 HRS

Fixed Expenses:
Rent & rates 46.8 13479.452
Insurance 92.8 26728.76
Taxes 42.57 12263
Interest 2631.05 757742.4
Variable Expenses:
Power & fuel 6941 4998000
17579.51 8245671.512

operation(1 YEAR)
operation
37
Machine Rate Calculation(dec12)
Plant A
OR (100-200 YEARS)
DIESAL used (per hour) 150 LITER

Fixed Expenses:
Rent & rates 46.8 13479.452
Insurance 92.8 26728.76
Taxes 42.57 12263
Interest 2631.05 757742.4
Depreciation(machine cost+additional cost - 3678.76 1059484.9
scrap)
Variable Expenses:
Power & fuel 7954 5725127
Total 18592.51 8972798.512

operation(1 YEAR)
overhead costs/total no of hours the machine is 845.0909091 13595.14848
in operation
38
Machine Rate Calculation(Jan 13)
Plant A

OR (100-200 YEARS)

Fixed Expenses:
Rent & rates 46.8 13479.452
Insurance 92.8 26728.76
Taxes 42.57 12263
Interest 2631.05 757742.4
scrap)
Variable Expenses:
Power & fuel 6612 4761092
Total 17250.51 8008763.512

operation(1 YEAR)
overhead costs/total no of hours the machine 784.0909091 12134.48939
is in operation
39
Machine Rate Calculation(Feb 2013)
Plant A

working life of machine(in hours): 1,000,000-2,000,000
cycles
OR (100-200
YEARS)


Fixed Expenses:
Rent & rates 46.8 13479.452
Insurance 92.8 26728.76
Taxes 42.57 12263
Interest 2631.05 757742.4
scrap)
Variable Expenses:
Power & fuel 6926 4986999
Total 17564.51 8234670.512

overhead rate:
operation(1 YEAR)
overhead costs/total no of hours the machine 798.3636364 12476.77273
is in operation
40
Machine Rate Calculation(Mar 2013)
Plant A

OR (100-200 YEARS)


Fixed Expenses:
Rent & rates 46.8 13479.452
Insurance 92.8 26728.76
Taxes 42.57 12263
Interest 2631.05 757742.4
scrap)
Variable Expenses:
Power & fuel 14511 5224002
25149.51 8471673.512
Machine hour rate or predetermined overhead

rate:
operation(1 YEAR)
overhead costs/total no of hours the machine is 1143.136364 12835.86818
in operation
41
Machine Rate Calculation(Apr 2013)
Plant A

OR (100-200 YEARS)


Fixed Expenses:
Rent & rates 46.8 13479.452
Insurance 92.8 26728.76
Taxes 42.57 12263
Interest 2631.05 757742.4
Variable Expenses:
Power & fuel 6926 4987889
17564.51 8235560.512

operation(1 YEAR)
operation
42
Machine Rate Calculation(may 2013)
Plant A
OR (100-200 YEARS)


Fixed Expenses:
Rent & rates 46.8 13479.452
Insurance 92.8 26728.76
Taxes 42.57 12263
Interest 2631.05 757742.4
Depreciation(machine cost+additional 3678.76 1059484.9
cost -scrap)
Variable Expenses:
Power & fuel 12544.44 9031999.04
23182.95 12279670.55
overhead rate:
operation(1 YEAR)
43
FINDINGS
It is observed that the the actual overhead costs incurred will in all probability differ from the
Overheads absorbed into the cost units.
From (Jul 12 – Aug 12 ) – Under absorbed
From(Aug12 - Sep 12) - Under absorbed
From(Sep 12- Oct 12) - Over absorbed
From(Oct 12- Nov 12) - Under absorbed
From(Nov 12- Dec 12) - Under absorbed
From(Dec 12- Jan 12) - Over absorbed
From(Jan 13- Feb 13) - Under absorbed
From(Feb 13- Mar 13) - Under absorbed
From(Mar 13- Apr 13) - Over absorbed
From(Apr 13- May 13) - Under absorbed
Month Machine Hour Rate
Jul-12 494
Aug-12 505
Sep-12 841
Oct-12 795
Nov-12 799
44
Dec-12 845
Jan-13 784
Feb-13 798
Mar-13 1143
Apr-13 798
May-13 1053
Machine hour rate fluctuations from the period of (Jul 12 – May 2013)
mhr
1400
1200
1000
800
600
mhr
400
200
0
CONCLUSION
Overheads are one of the factors which determine the firm’s profit. If they could properly account
and estimate/budget it for the upcoming financial year or upcoming accounting period of month,
the firm can enhance the profit with effective cost control, cost of production and efficient price
fixation of the product.
47
BIBLIOGRAPHY
1.)http://education.svtuition.org/2010/09/how-to-calculate-machine-hour-rate.html
http://www.fao.org/docrep/t0579e/t0579e05.htm
2.)Machine hour rate computation
http://www.preservearticles.com/2011092313987/steps-for-computation-of-machine-hour-rate.html
3.)calculation of machine hour rate
http://www.caclubindia.com/forum/machine-hour-rate-calculation-178373.asp#.Uh-NAtLDBqU
4.)Concept of machine hour rate
http://accountlearning.blogspot.in/2010/07/machine-hour-rate-method-of-providing.html
5.) A text book of cost accountancy, Vikas publishing Pvt. Ltd. By M.N.Arora
6.)Cost Accounting book, Book syndicate publications, by N.K. Prasad & A.K. Prasad

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INTRODUCTION

1.1 NEED FORTHE STUDY

1.2 OBJECTIVES OF THE STUDY

1.3 ADVANTAGES OF MACHINE HOUR RATE ANALYSIS

1) It helps to measure the relative efficiency of different machines.

COMPUTATION OF MACHINE HOUR RATE

2.1 Steps for computing the Machine Hour Rate:

2.2.1 Importance of accounting overheads

• Production • Fixed Indirect

• Distribution • Variable • Indirect

2.3.2 COLLECTION OF OVERHEADS

Documents for Collection of Overheads

Allocation of overheads is the process of charging overhead costs to a particular department or

Distribution of an overhead cost to several departments or cost centers is known as

Principles for Apportionment of Overheads

(a) Insurance of Plant & Machinery

Insured Value of stock

(a) Compensation to Workers Wages

Methods of Absorption of Overhead

Stage III:-Analyzing the Information

Stage IV: - Presenting the findings

5.4 PERIOD OF STUDY

Machine Rate Calculation(July 12)

Total 10880.91 7437673.052

DIESAL used (1 HOUR) 150 LITER

Expenses: per hour per month

Machine hour rate or predetermined overhead

overhead costs/total no of hours the machine is in 505.5818182 12135.95

machine name: IT 1200 A

Supervisors devote for the machine: 8 8HRS.

Calculation of overhead costs:

Machine hour rate or predetermined overhead rate:

Supervisors devote for the machine: 8 HRS.

Total 17504.51 8191671.122

Machine hour rate or predetermined overhead rate:

machine name: IT 1200 A

Supervisors devote for the machine: 8 HRS.

Calculation of overhead costs:

Machine hour rate or predetermined overhead rate:

Supervisors devote for the machine: 8 HRS.

Total 18592.51 8972798.512

machine name: IT 1200 A

Calculation of overhead costs:

Total 17250.51 8008763.512

Machine hour rate or predetermined overhead rate:

machine name: IT 1200 A

Supervisors devote for the machine: 8 HRS.

Calculation of overhead costs:

Total 17564.51 8234670.512

Machine hour rate or predetermined

machine name: IT 1200 A

Supervisors devote for the machine: 8 HRS.

Calculation of overhead costs:

Machine hour rate or predetermined overhead

machine name: IT 1200 A

Supervisors devote for the machine: 8 HRS.

Calculation of overhead costs:

Machine hour rate or predetermined overhead rate:

Supervisors devote for the machine: 8 HRS.

Calculation of overhead costs:

Overheads absorbed into the cost units.

From (Jul 12 – Aug 12 ) – Under absorbed

From(Aug12 - Sep 12) - Under absorbed