Labour Hour Absorption Rate Formula

Labour Hour Absorption Rate Formula

An absorption rate is calculated on the bases of Labour hour used by the different product is known as Labour hour absorption rate or absorption rate based on Labour hours. This absorption rate may be calculated by dividing production overheads with total number of Labour hours.

Absorption Rate (Labour Hr) = Production Overhead/Total Labour Hours

Labour Hour Absorption Rate Formula Example

Total overhead expenditure is $ 200,000 for two products (A, B). Total production hour is required for production is 10,000 (Hr). Calculate Labour Hour Absorption Rate

Solution

Absorption Rate (Labour Hr) = Production overhead/Total Labour hours

= $ 200,000 (production overhead)/ 10,000 Total Labour Hours

= $ 200,000/ 10,000

= $ 20 (labour hour absorption Rate)

Machine Hour Absorption Rate Formula

Machine Hour Absorption Rate Formula

An absorption rate is calculated on the bases of machine hour used by the different product is known as machine hour absorption rate or absorption rate based on machine hours. Machine hour absorption rate may be calculated by dividing production overheads with total number of machine hours.

Absorption Rate (Machine Hr) = Production Overhead/Total Machine Hours

Machine Hour Absorption Rate Formula Example

Total overhead expenditure is $ 150,000 for two products (A, B). Total production hour is required for production is 10,000 (Hr). Calculate machine Hour Absorption Rate

Absorption Rate (Machine Hr) = Production overhead/Total machine hours

= $ 150,000 (production overhead)/ 10,000 Total Machine Hours

= $ 150,000/ 10,000

= $ 15

Types of Production Costs

Types of Production Costs

1.    Direct Material Cost

Material which is directly used in a product is regarded as material cost. Material cost can be classified as direct cost (tractability classification) and variable cost (cost behavior classification).

2.    Labour Costs

Labour which is directly associated or linked with the production of product is known as labour costs. This can also be classified as direct cost and variable cost.

3.    Production overhead

All cost other than direct material and direct labour are combined known as production overhead or factory overheads. Example of production overheads are factory rent, supervision cost etc.

4.    Prime Costs

Direct material cost and direct labour cost are collectively known as prime cost. In other words you can calculate prime cost by adding these costs.

5.    Factory Costs

Direct material, direct labour, and factory overhead are collectively known as factory cost. In simple words by adding direct material cost, direct labour cost and production overhead cost, we can get factory cost.

6.    Cost of Goods Manufactured

Cost of goods manufactured can be obtained by adding work in progress of last year and deducting work in progress in current year.

7.    Cost of Goods sold

Cost of goods sold can be calculated by adding finished goods for last year and deducting finished goods for this year. When you will add finished good for last year with manufactured goods of this year , it will give you goods available for sale, and when closing stock of finished goods is deducted , it will give you cost of good sold.

Types of Costs

Types of Costs

Costs can be classified by using three fundamental way i.e. classification by nature, classification by tractability and classification by cost behavior.

1.     Classification By Cost

Under this cost classification, we can divide costs into three categories martial cost, labour cost, and overhands costs. This classification is widely used in the production environment. Production overhead is all costs other than labour & material.

2.    Classification By Cost

Under this classification costs can be categorized into direct cost and indirect cost. Those costs which can be traced directly to a product are regarded as direct cost, and other cost which cannot be directly traced to a product is known as indirect cost.

3.    Classification By Behavior

In this classification costs can be categories into variable cost and fixed cost. Those cost which changes with the level of activity is regarded as variable cost, while other cost which does not change with level activity are fixed costs.

Profit Reconciliation Formula

Profit Reconciliation Formula

Absorption and marginal cost profit difference may be reconciled by the following formulas. There are two different formula used i.e. one for stock increase and other for stock level decreased

Absorption Cost profit = Marginal cost profit + stock level increased during year

Absorption Cost profit = Marginal cost profit - stock level Decreased during year

Example (Stock Increased)

Marginal costing profit = 45,000

Opening Stock level = 40,000

Closing Stock Level = 45,000

Calculate absorption costing profit?

Solution

Absorption Cost profit = Marginal cost profit + stock level increased during year

= 45,000 + 5000

= 50,000

Example (Stock Decreased)

Marginal costing profit = 50,000

Opening Stock level = 40,000

Closing Stock Level = 30,000

Calculate absorption costing profit?

Solution

Absorption Cost profit = Marginal cost profit - stock level Decreased during year

=50,000-10,000

=40,000

Characteristics of Responsibility Accounting

Characteristics of Responsibility Accounting

Under this system business is divided into smaller parts for the better control and management of this business. The ideally supervisor of each unit which is technically called a center is responsible for the required level of performance.

Types of Centers

There are basically four types of centers Cost Centers Revenue Center Profit Center, Investment Center

1.    Cost Center

The costs are grouped by using appropriate bases. Typically cost center are establish to have more information about the incurring of cost and control cost .The example of cost center are

·                     Product line

·                     Department

·                     Region

·                     Manager/Supervisor

2.    Revenue Center

In case of revenue center the manager is responsible for the revenue of that center. The possible revenue center may be

·                    Product

·                    Department

·                    Region

·                    Distributor

3.    Profit Center

Profit center is combination of both cost center and revenue center. Typically Profit center is an independent unit of business which can be analyzed for his performance and contribution towards overall profit of the organization. The center is important for the efficiency measurement.

4.    Investment Center

This is an extension of profit center and more autonomy is provided to this center. The relatively senior management is heading this center. The important factor of this center is that it can make some investment decision. This center can make capital asset purchase decision. This center is typically a divisional headquarter of a multinational company.

Limitations of Market Penetration Pricing

Limitations of Market Penetration Pricing

Penetration pricing strategy to get high market share by reducing price does not hold true in all circumstances. There are some limitations of this strategy i.e. high competition in the market, high growth opportunities, quality of product, and brand role.

1.    Competitor Will React

Penetration pricing strategy does not work in competitive market, because in high competitive market, competitor will react immediately, and thus desired market share cannot be attain by redacting prices.

2.    Growth Encourages Entry

Penetration strategy cannot stop the new entry in the market, because growth opportunities will encourage people to invest in the industry to get their share out of growing market. Therefore penetration strategy will not prevent new entry in markets which have high growth potentials or expectations.

3.    Quality Does Matter

Price is not the sole factor for capturing the market share. Quality of product is also an important factor, and people are ready to pay high price for improved quality.Therefore improved quality at lower price is the best strategy to capture the market share, instead of just focusing on price reduction.

4.    Brand Name Play Role

It is not easy to compete with the good brand by lowering the price. People are ready to pay more for brand reputation. competing with a reputable brand by lowering prices is not a suggested option.