Question

In: Accounting

1.Some companies use labor cost to apply factory overhead to jobs. Identify other factors that a...

1.Some companies use labor cost to apply factory overhead to jobs. Identify other factors that a company might reasonably use to apply overhead costs.

2.Why must a company use predetermined overhead rates when using job order costing?

Please explain in a paragraph for each question. "ThankYou"

Solutions

Expert Solution

1. While selecting a base for the application of overhead, the company considers the factors which drives the overhead. For example, when the operations of a company are labor intensive, it uses direct labor hours or direct labor costs as an allocation base. If a company's production is machine intensive, the overhead costs are likely driven by machine hours. Thus, the company can use machine hours as the allocation base.If activity based costing is used, than various activity driving allocation bases are used.

2. Usage of a predetermine overhead rate over actual overhead incurred is referred to as job order costing. Actual overhead costs might fluctuate month to month causing an abnormal amount of overhead to be charged to jobs during high cost periods. Further, actual overhead data is available only towards the end of the month , quarter or year whereas managers need to know the cost of a job as and when completed. Thus, for the ease of operations, a predetermined overhead rate is used.

ekkarill92 answered 2 years ago
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