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Accounting

Autor:   •  April 4, 2016  •  Study Guide  •  308 Words (2 Pages)  •  453 Views

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In a job-order costing system, companies can assign the actual direct materials cost and direct labor cost to specific jobs.However, manufacturing overhead costs cannot be assigned to specific jobs on the basis of actual costs incurred.The reason is that manufacturing overhead relates to production operations as a whole, and actual overhead costs are not available until after a period is over.Therefore, manufacturing overhead costs are assigned on an estimated basis using a predetermined manufacturing overhead rate.That is, companies estimate total overhead costs at the beginning of a year, estimate the level of activity for the year, and develop a predetermined overhead rate based on these estimates.A predetermined manufacturing overhead rate is the rate to apply manufacturing overhead to work in process inventory and to specific jobs. It is the estimated annual overhead costs dividedby the expected annual operating activity, expressed in terms of a common activity base.Common activity bases used in the calculation include direct labor costs, direct labor hours,machine hours, production units, or any other measure that can provide an equitable basis forapply overhead costs to jobs.In this case of Wall Décor, each product is allocated an amount ofmanufacturing overhead, based on the cost of the print.In sum, the formula for thepredetermined overhead rate is:

Estimated Annual Overhead Costs÷Expected Annual Operating Activity

= Predetermined Overhead Rate

The advantages using cost of each print as a manufacturing overhead cost driver are:

Easy to manage the job into individual specific jobs of departments

To allocate specific jobs or department cost

Every department specialize in the same specific jobs

To

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