It can have a substantial impact on reported profits and key management decisions.
The two main reasons are the automation of functions previously performed by direct labor and the increasing complexity of products requiring skilled indirect workers.
1. Manufacturing overhead is an indirect cost, making it hard to trace to a specific product. 2. It consists of various items, from machine grease to production manager salaries. 3. Total manufacturing overhead costs remain relatively constant despite fluctuations in production units.
Park Place Entertainment held a weight-loss contest, resulting in a significant reduction in employee weight and associated healthcare costs.
The total product cost ($1,800) is divided by the number of units (2) to obtain the unit product cost ($900).
By dividing the estimated total manufacturing overhead cost for the year by the estimated total amount of the allocation base.
Renault focused on using people instead of machines for assembly, resulting in lower production costs and a simplified design, allowing the car to be sold at a lower price.
$6 per machine-hour.
A cost driver is a factor, such as machine-hours or direct labor-hours, that causes overhead costs and should ideally be used as the allocation base in the predetermined overhead rate.
Overhead is applied to Work in Process using the predetermined overhead rate, which is based on estimates established before the year begins.
The cost of a completed job consists of the actual direct materials cost, the actual direct labor cost, and the manufacturing overhead cost applied to the job.
Direct materials, direct labor, and manufacturing overhead.
Activity-based costing is designed to more accurately reflect the demands that products, customers, and other cost objects make on overhead resources, especially when direct labor is not an appropriate allocation base.
Direct labor cost consists of labor charges that are easily traced to a particular job, while labor that cannot be traced is treated as manufacturing overhead.
Time tickets are used to record the time employees spend on each job and task.
Process costing is used in companies that produce many units of a single product for long periods, accumulating costs in a particular operation or department.
The total manufacturing overhead incurred was $40,000.
$50,000
Costs that cannot be directly traced to a product are assigned by averaging across time and products, influenced by the type of production process.
$90,000.
Overhead applied to a particular job = Predetermined overhead rate × Actual direct labor-hours charged to the job.
$28,000
All of the costs appearing on the job cost sheets of the jobs that are in process.
A sales order is prepared as a basis for issuing a production order.
Labor costs are classified as either direct or indirect labor.
$60,000 was recorded for direct labor.
$40,000 of direct labor cost was charged to Job A.
By means of the predetermined overhead rate.
Costs are traced and allocated to jobs, and then divided by the number of units in the job to arrive at an average cost per unit.
Indirect labor costs include supervision, janitorial work, and maintenance.
To determine the gross profit for the job or tour.
If the allocation base does not accurately drive overhead costs, it can lead to distorted product costs, such as overcosting products with high direct labor-hour requirements when direct labor-hours are used as the base.
When actual overhead costs differ from applied overhead costs, it results in a debit or credit balance in the Manufacturing Overhead account, indicating an over- or under-applied overhead.
Using a predetermined rate helps avoid fluctuations in overhead costs due to seasonal factors that can affect actual rates.
Costs are accumulated on a job cost sheet prepared by the accounting department.
The total cost is calculated by summing the costs of direct materials, direct labor, and manufacturing overhead.
An allocation base is a measure, such as direct labor-hours or machine-hours, used to assign overhead costs to products and services.
Chrysler's Dodge Nitro had excessive configurations leading to high support costs, while simpler models like the Honda CR-V were more profitable due to fewer configurations.
Direct labor can be easily traced to a specific job, while indirect labor includes tasks like maintenance and supervision that cannot be directly traced.
Job-order costing is used in situations where many different products are produced each period, allowing for the tracking of costs for each specific job.
Most companies use predetermined overhead rates to avoid fluctuations in product costs and to have timely information about manufacturing overhead assigned to jobs.
Overhead applied to a particular job is calculated by multiplying the predetermined overhead rate by the amount of the allocation base incurred by the job.
$30,000
$8 per direct labor-hour.
Overhead should still be applied to that job to determine the cost of work in process inventory.
A production order initiates work on a job.
It lists the type and quantity of each type of direct material needed to complete a unit of product.
Absorption costing assigns all manufacturing costs, both fixed and variable, to units of product, meaning units fully absorb manufacturing costs.
All manufacturing costs, including direct materials and manufacturing overhead.
To get their foot in the door for future orders if the design works.
Chrysler's CEO planned to reduce the number of configurations for the 2008 Nitro from 167,000 to 650 and for the Pacifica from 35,820 to 680.
Computerized systems use bar codes to capture data, eliminating manual recording and increasing timeliness and accuracy.
$2,000
The manufacturing overhead assigned to a job would not be known until the end of the year if actual overhead rates are computed annually based on the actual costs and activity for the year.
$216 of overhead cost was applied to Job 2B47.
The job cost sheet includes details such as job number, description, quantity, unit cost, total cost, direct materials, direct labor, and manufacturing overhead.
Unit product costs are computed using the job cost sheet, which is used to value ending inventories and determine cost of goods sold.
It specifies the type and quantity of materials to be drawn from the storeroom and identifies the job that will be charged for the cost of the materials.
The predetermined overhead rate is computed by dividing the total estimated manufacturing overhead cost for the period by the estimated total amount of the allocation base.
The incremental cost of an additional unit is something less than the average unit cost of $900.
A completed time ticket includes an hour-by-hour summary of the employee’s activities, job number, time spent, and nature of indirect labor tasks.
Purchased raw materials are initially recorded as an asset in the Raw Materials account.
It represents the actual overhead costs added to the account and the application of overhead to Work in Process.
No, actual overhead costs are not charged to jobs and do not appear on the job cost sheet.
The costs for direct materials, labor, and manufacturing overhead are recorded on the job cost sheet.
The requisition number from the materials requisition form is recorded on the job cost sheet.
$1,800
Manufacturing Overhead is debited and Accounts Payable (or Cash) is credited.
All manufacturing costs other than direct materials and direct labor are classified as manufacturing overhead costs.
Estimated overhead costs are used to provide a more accurate allocation of costs based on expected activity levels, allowing for better budgeting and planning.
$30,000
A specific tour offered by VBT Bicycling Vacations can be considered a job, with costs detailed in a job cost sheet.
$50,000
Debit Work in Process for $90,000 and credit Manufacturing Overhead for $90,000.
The predetermined overhead rate is calculated by dividing the estimated total manufacturing overhead cost by the estimated total amount of the allocation base.
All manufacturing overhead costs as they are incurred during a period.
A job cost sheet is a form prepared for a job that records the materials, labor, and manufacturing overhead costs charged to that job.
It is issued when an agreement has been reached with the customer concerning quantities, prices, and shipment date for the order.
A job is a specific order, such as 1,000 stonewashed men’s blue denim jeans, for which costs are traced and allocated.
Job-order costing is used in manufacturing, hospitals, law firms, movie studios, accounting firms, advertising agencies, and repair shops.
$52,000
The overhead rate would go up in the winter and summer and down in the spring and fall, leading to different manufacturing overhead costs for identical jobs completed in different seasons.
The predetermined overhead rate is used to apply overhead cost to jobs throughout the period before it begins.
The Manufacturing Overhead account operates as a clearing account where actual factory overhead costs are debited as incurred, and overhead costs are applied to jobs using a predetermined overhead rate.
$22,000
$60,000
