Blanket Absorption Rate
These terms are used in relation to the recovery or absorption of overhead. In ease, a common absorption rate for overhead is used throughout a factory and for all jobs and units of production irrespective of the department in which they were produced, it is termed as ‘blanket absorption rate‘.
A common absorption rate is not appropriate in case where there are number of departments in the factory and the jobs or units of production do not spend an equal amount of time in each department or all the jobs or units do not pass through all the departments in the factory. In such cases, departmental overhead rate of respective departments (calculated on the basis of amount of overhead assigned to each department) is applied to the jobs or units of production on the basis of the time spent in each department instead of blanket absorption rate.
Departmental Absorption Rate
The overhead absorption rate calculated separately for each department of the factory is termed as ‘departmental absorption rate’. It is advisable to establish separate overhead rates for each department in order to ensure that all jobs and units of production are charged with their fair share of overheads in cases where these jobs and units do not spend approximately the same time in each department.
ABC Ltd., manufacturing engineering components, provides the following budgeted information for the year 2019-20.
Calculate the blanket and departmental overhead absorption rates and overhead to be to Job ‘X’ under both the method.
Calculation of Departmental Overhead Rates
Calculation of Blanket Overhead Absorption Rate:
Overhead Rate = Total Overhead / Total Machine Hours
= $5,50,000 / 40,000 machine hours
Calculation of overhead to be charged to Job ‘X’ (on the basis of the departmental overhead rate)
Calculation of overhead to be charged to Job ‘X’ (on the basis of blanket overhead rate)
Total machine hours to be used on Job ‘X’ = 40 + 50 + 30 + 20 = 140 machine hours
Blanket overhead rate = $13.75
Overhead to be charged to Job X = 140 machine hours x $13.75