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Cost Driver Rate (CDR)

Topic: Activity Based Costing (ABC)Chapter: Chapter 1
Cost Driver Rate=Total Cost of Activity PoolTotal Quantity of Cost Driver\text{Cost Driver Rate} = \frac{\text{Total Cost of Activity Pool}}{\text{Total Quantity of Cost Driver}}
This formula calculates the rate at which an activity is charged per unit of the cost driver. It is used to allocate overheads from a specific cost pool to cost objects.

Allocated Overhead Cost

Topic: Activity Based Costing (ABC)Chapter: Chapter 1
Allocated Overhead=Cost Driver Rate×Actual Quantity of Cost Driver Consumed\text{Allocated Overhead} = \text{Cost Driver Rate} \times \text{Actual Quantity of Cost Driver Consumed}
Used to determine the specific amount of overhead cost to be assigned to a particular product, service, or customer based on their actual usage of the activity.

Total Product Cost under ABC

Topic: Activity Based Costing (ABC)Chapter: Chapter 1
Total Cost=Direct Materials+Direct Labour+∑(Allocated Activity Costs)\text{Total Cost} = \text{Direct Materials} + \text{Direct Labour} + \sum (\text{Allocated Activity Costs})
The summation of all direct costs and the various overheads allocated through different activity pools to arrive at the final cost of a product.

Activity Rate (Cost Driver Rate)

Topic: Activity Based Costing (ABC)Chapter: Chapter 1
Activity Rate=Total Cost of Activity PoolTotal Quantity of Cost Driver for that Activity\text{Activity Rate} = \frac{\text{Total Cost of Activity Pool}}{\text{Total Quantity of Cost Driver for that Activity}}
This formula calculates the rate at which costs are incurred for each unit of the cost driver associated with a specific activity. It is a crucial step in allocating activity costs to products or services based on their consumption of the activity.

Overhead Cost Allocated to a Product (per activity)

Topic: Activity Based Costing (ABC)Chapter: Chapter 1
Allocated Overhead Cost=Activity Rate×Quantity of Cost Driver Consumed by Product\text{Allocated Overhead Cost} = \text{Activity Rate} \times \text{Quantity of Cost Driver Consumed by Product}
This formula determines the portion of an activity's cost that is assigned to a particular product or service. It is calculated by multiplying the activity rate by the amount of the cost driver consumed by that product for the specific activity.

Total Overhead Cost per Product

Topic: Activity Based Costing (ABC)Chapter: Chapter 1
Total Overhead Cost per Product=∑(Allocated Overhead Cost for each Activity)\text{Total Overhead Cost per Product} = \sum (\text{Allocated Overhead Cost for each Activity})
This formula sums up all the overhead costs allocated to a specific product from all the different activities it consumes. It provides the total overhead burden for a particular product or service under the ABC system.

Overhead Cost per Unit (using ABC)

Topic: Activity Based Costing (ABC)Chapter: Chapter 1
Overhead Cost per Unit=Total Overhead Cost per ProductNumber of Units Produced of that Product\text{Overhead Cost per Unit} = \frac{\text{Total Overhead Cost per Product}}{\text{Number of Units Produced of that Product}}
This formula calculates the average overhead cost assigned to each unit of a specific product, based on the total overheads allocated using Activity Based Costing. It helps in determining a more accurate unit product cost.

Cost per Unit of Good Production

Topic: Process CostingChapter: Chapter 1
Cost per Unit=Total Process Cost−Scrap Value of Normal LossInput Units−Normal Loss Units\text{Cost per Unit} = \frac{\text{Total Process Cost} - \text{Scrap Value of Normal Loss}}{\text{Input Units} - \text{Normal Loss Units}}
Used to find the cost of one unit of good output. The numerator represents net costs after deducting scrap value, and the denominator represents the expected good units.

Abnormal Loss Value

Topic: Process CostingChapter: Chapter 1
Value of Abnormal Loss=Abnormal Loss Units×Cost per Unit of Good Production\text{Value of Abnormal Loss} = \text{Abnormal Loss Units} \times \text{Cost per Unit of Good Production}
Used when actual loss exceeds normal loss. The abnormal loss is valued at the same rate as good units and charged to the Costing Profit & Loss Account.

Abnormal Gain Value

Topic: Process CostingChapter: Chapter 1
Value of Abnormal Gain=Abnormal Gain Units×Cost per Unit of Good Production\text{Value of Abnormal Gain} = \text{Abnormal Gain Units} \times \text{Cost per Unit of Good Production}
Used when actual loss is less than normal loss. This gain is treated as a credit to the Process Account and valued at the standard cost per unit.

Equivalent Production (Work-in-Progress)

Topic: Process CostingChapter: Chapter 1
Equivalent Units=Physical Units×Percentage of Completion100\text{Equivalent Units} = \text{Physical Units} \times \frac{\text{Percentage of Completion}}{100}
Used to convert partially completed units into an equivalent number of fully completed units for cost allocation purposes.

Cost per Equivalent Unit

Topic: Process CostingChapter: Chapter 1
Cost per Equivalent Unit=Total Cost of ProcessTotal Equivalent Units\text{Cost per Equivalent Unit} = \frac{\text{Total Cost of Process}}{\text{Total Equivalent Units}}
Calculates the cost assigned to one fully completed unit equivalent, considering different stages of completion for materials, labor, and overheads.

Equivalent Production Units (Weighted Average Method)

Topic: Process CostingChapter: Chapter 1
EPUelement=UCTO+(UCWIP×%CCWIP,element)+(UAL×%CAL,element)−(UAG×%CAG,element)EPU_{element} = U_{CTO} + (U_{CWIP} \times \%C_{CWIP, element}) + (U_{AL} \times \%C_{AL, element}) - (U_{AG} \times \%C_{AG, element})
Calculates the equivalent units of production for a specific cost element (e.g., Material, Labour, Overhead) under the Weighted Average method. It sums units completed, equivalent units in closing WIP, equivalent units of abnormal loss, and subtracts equivalent units of abnormal gain. UCTOU_{CTO} = Units Completed & Transferred Out; UCWIPU_{CWIP} = Units in Closing WIP; %CCWIP,element\%C_{CWIP, element} = % Completion of Closing WIP for element; UALU_{AL} = Units of Abnormal Loss; %CAL,element\%C_{AL, element} = % Completion of Abnormal Loss for element; UAGU_{AG} = Units of Abnormal Gain; %CAG,element\%C_{AG, element} = % Completion of Abnormal Gain for element.

Equivalent Production Units (FIFO Method)

Topic: Process CostingChapter: Chapter 1
EPUelement=(UOWIP×%COWIP,remaining,element)+US&C+(UCWIP×%CCWIP,element)+(UAL×%CAL,element)−(UAG×%CAG,element)EPU_{element} = (U_{OWIP} \times \%C_{OWIP, remaining, element}) + U_{S\&C} + (U_{CWIP} \times \%C_{CWIP, element}) + (U_{AL} \times \%C_{AL, element}) - (U_{AG} \times \%C_{AG, element})
Calculates the equivalent units of production for a specific cost element under the FIFO method. It considers the work done on opening WIP in the current period, units started and completed, equivalent units in closing WIP, equivalent units of abnormal loss, and subtracts equivalent units of abnormal gain. UOWIPU_{OWIP} = Units in Opening WIP; %COWIP,remaining,element\%C_{OWIP, remaining, element} = % Completion remaining for Opening WIP for element; US&CU_{S\&C} = Units Started & Completed in current period; other variables as above.

Cost Per Equivalent Unit (Weighted Average Method)

Topic: Process CostingChapter: Chapter 1
CPEUelement=(COWIP,element+CCurrent,element−SVNL,element)EPUelementCPEU_{element} = \frac{(C_{OWIP, element} + C_{Current, element} - SV_{NL, element})}{EPU_{element}}
Determines the cost per equivalent unit for a specific cost element by dividing the total cost (opening WIP cost + current period cost - scrap value of normal loss) by the equivalent production units for that element. COWIP,elementC_{OWIP, element} = Cost of Opening WIP for element; CCurrent,elementC_{Current, element} = Current Period Cost for element; SVNL,elementSV_{NL, element} = Scrap Value of Normal Loss for element; EPUelementEPU_{element} = Equivalent Production Units for element (Weighted Average).

Cost Per Equivalent Unit (FIFO Method)

Topic: Process CostingChapter: Chapter 1
CPEUelement=(CCurrent,element−SVNL,element)EPUelementCPEU_{element} = \frac{(C_{Current, element} - SV_{NL, element})}{EPU_{element}}
Determines the cost per equivalent unit for a specific cost element by dividing the current period's net cost (current period cost - scrap value of normal loss) by the equivalent production units for that element. CCurrent,elementC_{Current, element} = Current Period Cost for element; SVNL,elementSV_{NL, element} = Scrap Value of Normal Loss for element; EPUelementEPU_{element} = Equivalent Production Units for element (FIFO).

Cost of Units Completed and Transferred Out (Weighted Average Method)

Topic: Process CostingChapter: Chapter 1
CostCTO=UCTO×∑CPEUelementCost_{CTO} = U_{CTO} \times \sum CPEU_{element}
Calculates the total cost of units completed and transferred out by multiplying the number of units by the sum of cost per equivalent unit for all cost elements. UCTOU_{CTO} = Units Completed & Transferred Out; ∑CPEUelement\sum CPEU_{element} = Sum of Cost Per Equivalent Unit for all elements.

Cost of Units Completed and Transferred Out (FIFO Method)

Topic: Process CostingChapter: Chapter 1
CostCTO=COWIP+∑(UOWIP×%COWIP,remaining,element×CPEUelement)+(US&C×∑CPEUelement)Cost_{CTO} = C_{OWIP} + \sum (U_{OWIP} \times \%C_{OWIP, remaining, element} \times CPEU_{element}) + (U_{S\&C} \times \sum CPEU_{element})
Calculates the total cost of units completed and transferred out under the FIFO method. It includes the cost of opening WIP, the cost to complete opening WIP in the current period, and the cost of units started and completed in the current period. COWIPC_{OWIP} = Total Cost of Opening WIP; UOWIPU_{OWIP} = Units in Opening WIP; %COWIP,remaining,element\%C_{OWIP, remaining, element} = % Completion remaining for Opening WIP for element; CPEUelementCPEU_{element} = Cost Per Equivalent Unit for element (FIFO); US&CU_{S\&C} = Units Started & Completed in current period; ∑CPEUelement\sum CPEU_{element} = Sum of Cost Per Equivalent Unit for all elements (FIFO).

Valuation of Closing Work-in-Progress (WIP)

Topic: Process CostingChapter: Chapter 1
CostCWIP=∑(UCWIP×%CCWIP,element×CPEUelement)Cost_{CWIP} = \sum (U_{CWIP} \times \%C_{CWIP, element} \times CPEU_{element})
Calculates the total cost of closing work-in-progress by summing the cost of equivalent units for each cost element. UCWIPU_{CWIP} = Units in Closing WIP; %CCWIP,element\%C_{CWIP, element} = % Completion of Closing WIP for element; CPEUelementCPEU_{element} = Cost Per Equivalent Unit for element.

Valuation of Abnormal Loss (Net)

Topic: Process CostingChapter: Chapter 1
NetCostAL=(∑(UAL×%CAL,element×CPEUelement))−SVALNet Cost_{AL} = \left( \sum (U_{AL} \times \%C_{AL, element} \times CPEU_{element}) \right) - SV_{AL}
Calculates the net cost of abnormal loss. It sums the cost of equivalent units for each cost element in abnormal loss and then subtracts any scrap value realized from these units. UALU_{AL} = Units of Abnormal Loss; %CAL,element\%C_{AL, element} = % Completion of Abnormal Loss for element; CPEUelementCPEU_{element} = Cost Per Equivalent Unit for element; SVALSV_{AL} = Scrap Value of Abnormal Loss.

Valuation of Abnormal Gain (Net Effect)

Topic: Process CostingChapter: Chapter 1
NetCostAG=(∑(UAG×%CAG,element×CPEUelement))−SVAGNet Cost_{AG} = \left( \sum (U_{AG} \times \%C_{AG, element} \times CPEU_{element}) \right) - SV_{AG}
Calculates the net cost effect of abnormal gain. It sums the cost of equivalent units for each cost element in abnormal gain and then subtracts the scrap value that would have been realized if these units were normal loss. This amount effectively reduces the cost of good units. UAGU_{AG} = Units of Abnormal Gain; %CAG,element\%C_{AG, element} = % Completion of Abnormal Gain for element; CPEUelementCPEU_{element} = Cost Per Equivalent Unit for element; SVAGSV_{AG} = Scrap Value of Abnormal Gain.

Normal Loss Units

Topic: Process CostingChapter: Chapter 1
UNL=UInput×%NLU_{NL} = U_{Input} \times \%NL
Calculates the number of units considered as normal loss based on the total input units and the predetermined normal loss percentage. UNLU_{NL} = Units of Normal Loss; UInputU_{Input} = Total Input Units (or relevant base for loss calculation); %NL\%NL = Normal Loss Percentage.

Economic Order Quantity (EOQ)

Topic: Material and Labour CostingChapter: Chapter 1
EOQ=2×A×OCEOQ = \sqrt{\frac{2 \times A \times O}{C}}
Used to determine the optimal order size that minimizes the total cost of ordering and carrying inventory. Where A = Annual Consumption, O = Ordering Cost per order, and C = Carrying Cost per unit per annum.

Re-order Level (ROL)

Topic: Material and Labour CostingChapter: Chapter 1
ROL=Maximum Consumption×Maximum Re-order PeriodROL = \text{Maximum Consumption} \times \text{Maximum Re-order Period}
The inventory level at which a new order should be placed to avoid stock-outs. It considers the worst-case scenario of usage and lead time.

Minimum Stock Level

Topic: Material and Labour CostingChapter: Chapter 1
Minimum Level=ROL−(Normal Consumption×Normal Re-order Period)\text{Minimum Level} = ROL - (\text{Normal Consumption} \times \text{Normal Re-order Period})
The safety buffer level below which inventory should not fall to prevent production interruptions.

Maximum Stock Level

Topic: Material and Labour CostingChapter: Chapter 1
Maximum Level=(ROL+Re-order Quantity)−(Minimum Consumption×Minimum Re-order Period)\text{Maximum Level} = (ROL + \text{Re-order Quantity}) - (\text{Minimum Consumption} \times \text{Minimum Re-order Period})
The upper limit of inventory to prevent overstocking and excessive carrying costs.

Average Stock Level

Topic: Material and Labour CostingChapter: Chapter 1
Average Level=Minimum Level+extMaximumLevel2\text{Average Level} = \frac{\text{Minimum Level} + ext{Maximum Level}}{2}
A measure of the typical inventory held during a period. Alternatively, it can be calculated as \text{Minimum Level} + \frac{1}{2} \text{Re-order Quantity}.

Inventory Turnover Ratio

Topic: Material and Labour CostingChapter: Chapter 1
Inventory Turnover Ratio=Cost of Materials ConsumedAverage Inventory\text{Inventory Turnover Ratio} = \frac{\text{Cost of Materials Consumed}}{\text{Average Inventory}}
Measures how many times a company has replaced its inventory during a specific period. A higher ratio indicates efficient inventory management.

Labour Efficiency Ratio

Topic: Material and Labour CostingChapter: Chapter 1
Efficiency Ratio=Standard Hours for Actual ProductionActual Hours Worked×100\text{Efficiency Ratio} = \frac{\text{Standard Hours for Actual Production}}{\text{Actual Hours Worked}} \times 100
Used to evaluate the productivity of labor by comparing the time allowed for a task against the actual time taken.

Labour Idle Time Ratio

Topic: Material and Labour CostingChapter: Chapter 1
Idle Time Ratio=Idle HoursTotal Hours Worked×100\text{Idle Time Ratio} = \frac{\text{Idle Hours}}{\text{Total Hours Worked}} \times 100
Measures the percentage of time workers are paid but are not productive due to various reasons like machine breakdown or power failure.

Labour Deferential/Variance (Basic)

Topic: Material and Labour CostingChapter: Chapter 1
Labour Rate Variance=(Standard Rate−Actual Rate)×Actual Hours\text{Labour Rate Variance} = (\text{Standard Rate} - \text{Actual Rate}) \times \text{Actual Hours}
Calculates the difference between what should have been paid for labor and what was actually paid.

Reorder Level (ROL)

Topic: Material and Labour CostingChapter: Chapter 1
Reorder Level=Maximum Consumption Rate×Maximum Reorder Period\text{Reorder Level} = \text{Maximum Consumption Rate} \times \text{Maximum Reorder Period}
The level of stock at which a new order should be placed to ensure continuous supply.

Danger Level

Topic: Material and Labour CostingChapter: Chapter 1
Danger Level=Average Consumption Rate×Emergency Reorder Period\text{Danger Level} = \text{Average Consumption Rate} \times \text{Emergency Reorder Period}
A level below which stock should not fall, indicating immediate action is needed to procure materials.

Inventory Turnover Period

Topic: Material and Labour CostingChapter: Chapter 1
Inventory Turnover Period=Number of Days/Months in a PeriodInventory Turnover RatioORAverage InventoryCost of Goods Sold×Number of Days/Months\text{Inventory Turnover Period} = \frac{\text{Number of Days/Months in a Period}}{\text{Inventory Turnover Ratio}} \quad \text{OR} \quad \frac{\text{Average Inventory}}{\text{Cost of Goods Sold}} \times \text{Number of Days/Months}
Indicates the average number of days or months inventory is held before being sold.

Material Cost Variance (MCV)

Topic: Material and Labour CostingChapter: Chapter 1
MCV=(Standard Cost−Actual Cost)OR(Standard Quantity×Standard Price)−(Actual Quantity×Actual Price)\text{MCV} = (\text{Standard Cost} - \text{Actual Cost}) \quad \text{OR} \quad (\text{Standard Quantity} \times \text{Standard Price}) - (\text{Actual Quantity} \times \text{Actual Price})
Measures the difference between the standard cost of material and the actual cost of material used for actual production.

Material Price Variance (MPV)

Topic: Material and Labour CostingChapter: Chapter 1
MPV=(Standard Price−Actual Price)×Actual Quantity Purchased\text{MPV} = (\text{Standard Price} - \text{Actual Price}) \times \text{Actual Quantity Purchased}
Measures the difference between the standard price and the actual price paid for materials, multiplied by the actual quantity purchased.

Material Usage Variance (MUV)

Topic: Material and Labour CostingChapter: Chapter 1
MUV=(Standard Quantity for Actual Output−Actual Quantity Used)×Standard Price\text{MUV} = (\text{Standard Quantity for Actual Output} - \text{Actual Quantity Used}) \times \text{Standard Price}
Measures the difference between the standard quantity of material that should have been used and the actual quantity used, valued at standard price.

Material Mix Variance (MMV)

Topic: Material and Labour CostingChapter: Chapter 1
MMV=∑[(Revised Standard Quantity−Actual Quantity)×Standard Price]where Revised Standard Quantity=Total Actual QuantityTotal Standard Quantity×Standard Quantity of that material\text{MMV} = \sum [(\text{Revised Standard Quantity} - \text{Actual Quantity}) \times \text{Standard Price}] \quad \text{where Revised Standard Quantity} = \frac{\text{Total Actual Quantity}}{\text{Total Standard Quantity}} \times \text{Standard Quantity of that material}
Measures the variance due to changes in the proportion of different materials used in a mix, assuming total input quantity remains the same.

Material Yield Variance (MYV)

Topic: Material and Labour CostingChapter: Chapter 1
MYV=(Actual Yield−Standard Yield for Actual Input)×Standard Cost per Unit of OutputOR(Standard Loss−Actual Loss)×Standard Cost per Unit of Output\text{MYV} = (\text{Actual Yield} - \text{Standard Yield for Actual Input}) \times \text{Standard Cost per Unit of Output} \quad \text{OR} \quad (\text{Standard Loss} - \text{Actual Loss}) \times \text{Standard Cost per Unit of Output}
Measures the variance due to the difference between the actual output (yield) and the standard output expected from the actual input of materials, valued at standard cost.

Labour Turnover Rate (Separation Method)

Topic: Material and Labour CostingChapter: Chapter 1
Labour Turnover Rate=Number of SeparationsAverage Number of Workers×100\text{Labour Turnover Rate} = \frac{\text{Number of Separations}}{\text{Average Number of Workers}} \times 100
Measures the percentage of workers who left the organization during a period.

Labour Turnover Rate (Replacement Method)

Topic: Material and Labour CostingChapter: Chapter 1
Labour Turnover Rate=Number of ReplacementsAverage Number of Workers×100\text{Labour Turnover Rate} = \frac{\text{Number of Replacements}}{\text{Average Number of Workers}} \times 100
Measures the percentage of workers replaced during a period.

Labour Turnover Rate (Flux Method)

Topic: Material and Labour CostingChapter: Chapter 1
Labour Turnover Rate=Number of Separations+Number of ReplacementsAverage Number of Workers×100\text{Labour Turnover Rate} = \frac{\text{Number of Separations} + \text{Number of Replacements}}{\text{Average Number of Workers}} \times 100
A comprehensive measure of labour turnover, considering both separations and replacements.

Halsey Plan Earnings

Topic: Material and Labour CostingChapter: Chapter 1
Earnings=(Time Taken×Hourly Rate)+(50%×Time Saved×Hourly Rate)\text{Earnings} = (\text{Time Taken} \times \text{Hourly Rate}) + (50\% \times \text{Time Saved} \times \text{Hourly Rate})
Calculates worker's earnings under the Halsey incentive plan, providing a bonus for time saved.

Rowan Plan Earnings

Topic: Material and Labour CostingChapter: Chapter 1
Earnings=(Time Taken×Hourly Rate)+(Time SavedStandard Time)×Time Taken×Hourly Rate\text{Earnings} = (\text{Time Taken} \times \text{Hourly Rate}) + \left(\frac{\text{Time Saved}}{\text{Standard Time}}\right) \times \text{Time Taken} \times \text{Hourly Rate}
Calculates worker's earnings under the Rowan incentive plan, where bonus is a proportion of time saved to standard time.

Labour Cost Variance (LCV)

Topic: Material and Labour CostingChapter: Chapter 1
LCV=(Standard Cost of Labour−Actual Cost of Labour)OR(Standard Hours for Actual Output×Standard Rate)−(Actual Hours Worked×Actual Rate)\text{LCV} = (\text{Standard Cost of Labour} - \text{Actual Cost of Labour}) \quad \text{OR} \quad (\text{Standard Hours for Actual Output} \times \text{Standard Rate}) - (\text{Actual Hours Worked} \times \text{Actual Rate})
Measures the difference between the standard cost of labour and the actual cost of labour for actual production.

Labour Rate Variance (LRV)

Topic: Material and Labour CostingChapter: Chapter 1
LRV=(Standard Rate−Actual Rate)×Actual Hours Worked\text{LRV} = (\text{Standard Rate} - \text{Actual Rate}) \times \text{Actual Hours Worked}
Measures the difference between the standard labour rate and the actual labour rate paid, multiplied by actual hours worked.

Labour Efficiency Variance (LEV)

Topic: Material and Labour CostingChapter: Chapter 1
LEV=(Standard Hours for Actual Output−Actual Hours Worked)×Standard Rate\text{LEV} = (\text{Standard Hours for Actual Output} - \text{Actual Hours Worked}) \times \text{Standard Rate}
Measures the difference between the standard hours that should have been taken for actual output and the actual hours taken, valued at standard rate.

Labour Idle Time Variance (LITV)

Topic: Material and Labour CostingChapter: Chapter 1
LITV=Idle Hours×Standard Rate\text{LITV} = \text{Idle Hours} \times \text{Standard Rate}
Measures the cost of unproductive time (idle time) due to abnormal reasons, valued at standard rate.

Labour Mix Variance (LMV)

Topic: Material and Labour CostingChapter: Chapter 1
LMV=∑[(Revised Standard Hours−Actual Hours)×Standard Rate]where Revised Standard Hours=Total Actual HoursTotal Standard Hours×Standard Hours of that labour type\text{LMV} = \sum [(\text{Revised Standard Hours} - \text{Actual Hours}) \times \text{Standard Rate}] \quad \text{where Revised Standard Hours} = \frac{\text{Total Actual Hours}}{\text{Total Standard Hours}} \times \text{Standard Hours of that labour type}
Measures the variance due to changes in the proportion of different grades or types of labour used in a mix, assuming total labour hours remain the same.

Labour Yield Variance (LYV)

Topic: Material and Labour CostingChapter: Chapter 1
LYV=(Actual Yield−Standard Yield for Actual Input)×Standard Labour Cost per Unit of OutputOR(Standard Loss−Actual Loss)×Standard Labour Cost per Unit of Output\text{LYV} = (\text{Actual Yield} - \text{Standard Yield for Actual Input}) \times \text{Standard Labour Cost per Unit of Output} \quad \text{OR} \quad (\text{Standard Loss} - \text{Actual Loss}) \times \text{Standard Labour Cost per Unit of Output}
Measures the variance due to the difference between the actual output (yield) and the standard output expected from the actual input of labour, valued at standard labour cost.

Overhead Absorption Rate (OAR) - Machine Hour Rate

Topic: OverheadsChapter: Chapter 1
OAR (Machine Hour Rate)=Total Budgeted Machine OverheadsTotal Budgeted Machine Hours\text{OAR (Machine Hour Rate)} = \frac{\text{Total Budgeted Machine Overheads}}{\text{Total Budgeted Machine Hours}}
Used in production departments where machines are the primary cost drivers. It calculates the cost incurred per machine hour.

Overhead Absorption Rate (OAR) - Direct Labour Hour Rate

Topic: OverheadsChapter: Chapter 1
OAR (Labour Hour Rate)=Total Budgeted Labour OverheadsTotal Budgeted Direct Labour Hours\text{OAR (Labour Hour Rate)} = \frac{\text{Total Budgeted Labour Overheads}}{\text{Total Budgeted Direct Labour Hours}}
Used in service or manual production departments where labor is the primary driver of overhead costs.

Overhead Absorption Rate (OAR) - Percentage of Direct Material Cost

Topic: OverheadsChapter: Chapter 1
\text{OAR (% of Material Cost)} = \left( \frac{\text{Total Budgeted Overheads}}{\text{Total Budgeted Direct Material Cost}} \right) \times 100
Used when overheads are expected to vary in direct proportion to the value of materials used.

Overhead Absorption Rate (OAR) - Percentage of Direct Labour Cost

Topic: OverheadsChapter: Chapter 1
\text{OAR (% of Labour Cost)} = \left( \frac{\text{Total Budgeted Overheads}}{\text{Total Budgeted Direct Labour Cost}} \right) \times 100
Commonly used when overheads are closely linked to the payroll/wages of the production staff.

Under/Over Absorption of Overheads

Topic: OverheadsChapter: Chapter 1
Absorption Difference=Absorbed Overheads−Actual Overheads\text{Absorption Difference} = \text{Absorbed Overheads} - \text{Actual Overheads}
If the result is positive, it is Over-absorption; if negative, it is Under-absorption. Absorbed Overheads = Actual Activity ×\times OAR.

Machine Hour Rate (Detailed Component)

Topic: OverheadsChapter: Chapter 1
Machine Hour Rate=Standing Charges (per hour)+Variable Charges (per hour)\text{Machine Hour Rate} = \text{Standing Charges (per hour)} + \text{Variable Charges (per hour)}
Standing charges are fixed costs (e.g., rent) divided by hours, while variable charges (e.g., power) are calculated per unit of consumption.

Overhead Absorption Rate (General)

Topic: OverheadsChapter: Chapter 1
Overhead Absorption Rate (OAR)=Budgeted (or Estimated) OverheadsBudgeted (or Estimated) Base\text{Overhead Absorption Rate (OAR)} = \frac{\text{Budgeted (or Estimated) Overheads}}{\text{Budgeted (or Estimated) Base}}
Calculates the rate at which overheads are to be absorbed into cost units. The 'Base' can be units, direct labour hours, machine hours, direct material cost, direct labour cost, or prime cost, depending on the method chosen.

Overhead Absorption Rate per Unit

Topic: OverheadsChapter: Chapter 1
OAR per Unit=Budgeted Production OverheadsBudgeted Number of Units\text{OAR per Unit} = \frac{\text{Budgeted Production Overheads}}{\text{Budgeted Number of Units}}
Determines the overhead cost to be applied to each unit of product manufactured. This method is suitable when all units are similar and require a uniform application of overheads.

Overhead Absorption Rate as Percentage of Direct Material Cost

Topic: OverheadsChapter: Chapter 1
OAR (% of Direct Material Cost)=Budgeted Production OverheadsBudgeted Direct Material Cost×100\text{OAR (\% of Direct Material Cost)} = \frac{\text{Budgeted Production Overheads}}{\text{Budgeted Direct Material Cost}} \times 100
Calculates the overhead absorption rate as a percentage of the direct material cost. This method is appropriate when overheads are closely related to the cost of materials.

Overhead Absorption Rate as Percentage of Direct Labour Cost

Topic: OverheadsChapter: Chapter 1
OAR (% of Direct Labour Cost)=Budgeted Production OverheadsBudgeted Direct Labour Cost×100\text{OAR (\% of Direct Labour Cost)} = \frac{\text{Budgeted Production Overheads}}{\text{Budgeted Direct Labour Cost}} \times 100
Calculates the overhead absorption rate as a percentage of the direct labour cost. This method is suitable when overheads are primarily driven by the cost of labour.

Overhead Absorption Rate as Percentage of Prime Cost

Topic: OverheadsChapter: Chapter 1
OAR (% of Prime Cost)=Budgeted Production OverheadsBudgeted Prime Cost×100\text{OAR (\% of Prime Cost)} = \frac{\text{Budgeted Production Overheads}}{\text{Budgeted Prime Cost}} \times 100
Calculates the overhead absorption rate as a percentage of the prime cost (Direct Material Cost + Direct Labour Cost). This method is used when overheads are influenced by both material and labour costs.

Overhead Absorption Rate per Direct Labour Hour

Topic: OverheadsChapter: Chapter 1
OAR per Direct Labour Hour=Budgeted Production OverheadsBudgeted Direct Labour Hours\text{OAR per Direct Labour Hour} = \frac{\text{Budgeted Production Overheads}}{\text{Budgeted Direct Labour Hours}}
Determines the overhead cost to be applied for each direct labour hour worked. This method is effective when production is labour-intensive and overheads vary with labour time.

Overhead Absorption Rate per Machine Hour

Topic: OverheadsChapter: Chapter 1
OAR per Machine Hour=Budgeted Production OverheadsBudgeted Machine Hours\text{OAR per Machine Hour} = \frac{\text{Budgeted Production Overheads}}{\text{Budgeted Machine Hours}}
Determines the overhead cost to be applied for each machine hour utilized. This method is suitable for machine-intensive production processes where overheads are driven by machine usage.

Calculation of Absorbed Overheads

Topic: OverheadsChapter: Chapter 1
Absorbed Overheads=Actual Base×Overhead Absorption Rate\text{Absorbed Overheads} = \text{Actual Base} \times \text{Overhead Absorption Rate}
Calculates the total overheads applied to production during a period by multiplying the actual activity level (e.g., actual units, actual labour hours) by the predetermined overhead absorption rate.

Under or Over Absorption of Overheads

Topic: OverheadsChapter: Chapter 1
Under/Over Absorption=Actual Overheads Incurred−Overheads Absorbed\text{Under/Over Absorption} = \text{Actual Overheads Incurred} - \text{Overheads Absorbed}
Determines the difference between the actual overheads incurred and the overheads absorbed into production. A positive result indicates under-absorption (actual > absorbed), while a negative result indicates over-absorption (actual < absorbed).
Chapter 1 Formulas — CA Intermediate | Kartavvya