Can somebody please explain the concept of supplementary overhead rates, it's application and why is it used ?
With best regards.
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Supplementary overhead rate
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Quick Summary
When there is undervaluation of Overhead then we calculate undervaluation overhead Rate or it's called supplementary Rate.
Undervaluation may be due to *Seasonal variation or *Faulty planning of Management. (transferred to P/L)
So, to cover undervaluation we use supplementary rate.
Eg. If 1000 unit of products is produced and 600 is sold and let undervaluation of OH is Rs.20,000 then OH rate comes Rs.20. So 600*20=12000 Will be transferred to P/L and Balance 400unit *20= 8000 we will increase price by 8000 of 400 units to recover Under absorption.
Supplementary overhead rate is used when there is under-absorption or over-absorption of overheads in costing. It helps in adjusting the difference between actual overheads and absorbed overheads.
Simple meaning:
If less overhead was charged → use a positive supplementary rate
If excess overhead was charged → use a negative supplementary rate
Formula:
Under/Over absorbed overhead ÷ Actual base (units, labour hours etc) = Supplementary Rate
It is mainly used to correct the cost of:
- Work-in-progress
- Finished goods
- Cost of sales
Example:
When overhead under-absorbed = ₹10000 and production = 1000 units then supplementary rate is ₹10 per unit. This additional amount of ₹10 is charged on the product.
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