Question

Why does management need to know the cost of a job? Discuss at least 5 reasons.

Describe a situation that may cause manufacturing overhead to be over allocated in a given year.
Also, describe a situation that may cause manufacturing overhead to be under allocated in a given year.

Answer 1

Management need to know the cost of the job for many reasons. Few of them are discussed below:

1. Management uses the cost of the job to help control costs and make the operation profitable.

2. The cost of the job is needed to know whether it is feasiable to continue or not.

3. GAAP require a company to maintain proper records of their costs.

4. The cost of the job help the management in financial planning such as budgeting.

5. Management need the cost to remain competative in the market.

Suppose, a company underestimated the base for allocating the manufacturing overheads, such as direct labour hours when determining the predetermined overhead rate. but the actual direct labour hours are more then estimated, it will result in overallocation of manufacturing overheads.

Suppose a company takes a factory equipment on rent in the middle of the year, due to which there is an unanticipated increase in overhead costs. that means the predetermined rate is too low and in the end of the year amount of allocated overheads is underallocated if compared to actual amount of overheads. The amount of actual overheads are more then overheads amount allocated.