Actual Direct labor costs and Actual Direct material costs are written [entered, or put] on A...

Actual Direct labor costs and Actual Direct material costs are written [entered, or put] on A job-order sheet. Estimated, not actual, manufacturing overhead costs are entered on a Job-order Sheet. A. Explain why estimated costs are used. B. Explain how the amount of manufacturing Overhead costs entered on a particular job-order cost sheet is determined.

Expert Solution

A) Pre-determined overhead rates are computed at beginning of the year based on estimated overheads and estimated activity driver. Activity driver can be machine hours or direct labor hours or direct labor cost depending on cost driver for overheads. Pre-determined overhead rates should be used due to following reasons

· Factory overheads consist of various overheads incurred during a period. Hence it is not possible to compute the actual overhead rate every time since it is tedious and time consuming exercise. Having a pre-determined overhead rate saves management efforts.

· It helps in eliminating distortions in cost allocation to products in different periods

· It helps in accurate product costing and comparison of product costs across the period

· It helps in setting product pricing at beginning of the year needed for various purposes

· It helps in decision making like submitting bids, taking up special orders, new product launch etc

B) The amount of manufacturing overheads on a particular job cost sheet is determined by applying predetermined overhead to the cost driver. For example if pre-determined overhead rate is $5 per direct labor hour and actual direct labor hours used on a particular job is 100 labor hours overhead applied is $500 (100 * $5) for the particular job.

ekkarill92 answered 2 years ago

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