Question

7. Explain how a sales order, a production order, a materials requisition form, and a labor time ticket are involved in producing and costing products.

8. Why do companies use predetermined overhead rates rather than actual manufacturing overhead costs to apply overhead to jobs?

9. If a company fully allocates all of its overhead costs to jobs, does this guarantee that a profit will be earned for the period?

10. Provide two reasons why overhead might be under-applied in a given year.

Answer 1

7. Explain how a sales order, a production order, a materials requisition form, and a labor time ticket are involved in producing and costing products.

Sales order:

A sales order triggers production (especially for a job order firm) and determines the specifications of the job which will help in costing the products.

Production order:

Production order is the authorization to produce goods as per the sale order. It contains the details of the order, the production size, the materials to be used etc. These details will help in planning for the cost collection against the order.

Material requisition form:

This is form raised by the production department and is an authorization for the materials department to issue the materials specified therein.

This form is the basis for arriving at the direct material cost of the order. The quantities are priced by the accounting department for arriving at the direct material cost for the order.

Labor time ticket:

This document tells how much time a laborer has spent on various jobs and helps in planning and controlling the labor time spent on the job. It can also be used to assess the progress made on the job.

The hours indicated by the time ticket are priced at appropriate rates and the labor cost spent on each job is noted against it.

8. Why do companies use predetermined overhead rates rather than actual manufacturing overhead costs to apply overhead to jobs?

Actual overhead costs would be available only at the end of the period and the costs so ascertained would not be helpful for decision making and control. Hence, companies use pre-determined overhead rates to assign overhead costs so that costs are made available as and when production takes place.

9. If a company fully allocates all of its overhead costs to jobs, does this guarantee that a profit will be earned for the period?

No. Full allocation of overhead does not guarantee profits. Profits depend on prices in relation to costs.

10. Provide two reasons why overhead might be under-applied in a given year.

a) The activity achieved would be lower than that used for determining the predetermined overhead rate.

b) The actual overhead would be more than the budgeted overhead.