Question
In: Accounting
3. Explain how companies assign manufacturing overhead costs to individual jobs.
3. Explain how companies assign manufacturing overhead costs to individual jobs.
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Expert Solution
Companies assign manufacturing overhead costs to individual jobs.
By using a Predetermined Overhead Rate
The aim is to allocate manufacturing overhead costs to jobs based on some common activity, such as direct labor hours, machine hours, or direct labor costs. The activity used to allocate manufacturing overhead costs to jobs is called an allocation base. Once the allocation base is selected, a predetermined overhead rate can be established based on allocation base. The predetermined overhead rate is calculated prior to the year in which it is used in allocating manufacturing overhead costs to jobs.
Predetermined Overhead Rate can be calculating overhead rate as follows, using estimates for the coming year:
Key Equation
Predetermined overhead rate=Estimated overhead costs*Estimated activity in allocation base**
*The numerator requires an estimate of all overhead costs for the year, such as indirect materials, indirect labor, and other indirect costs associated with the factory
**The denominator requires an estimate of activity in the allocation base for the year.
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