When applying manufacturing overhead to jobs, the formula to calculate the amoun

Question

When applying manufacturing overhead to jobs, the formula to calculate the amount is as follows:
A) Predetermined overhead rate divided by the actual manufacturing overhead incurred on the particular job.
B) Predetermined overhead rate times the actual manufacturing overhead incurred on the particular job.
C) Predetermined overhead rate divided by the actual units of allocation base charged to the particular job.
D) Predetermined overhead rate times the actual units of allocation base charged to the particular job.

Explanation / Answer

When applying manufacturing overhead to jobs, the formula to calculate the amount is as follows: D) Predetermined overhead rate times the actual units of allocation base charged to the particular job. Manufacturing overhead must be included with direct labor on the job cost sheet since manufacturing overhead is also a product cost. However, assigning manufacturing overhead to units of product can be a difficult task. There are three reasons for this: Manufacturing overhead is an indirect cost. This means that it is either impossible or difficult to trace these costs to a particular product or job. Manufacturing overhead consists of many different items ranging from the grease used in machines to the annual salary of production manager. Even though output may fluctuate due to seasonal or other factors, manufacturing overhead costs tend to remain relatively constant due to the presence of fixed costs. Given these problems, about the only way to assign overhead costs to production is to use an allocation process. This allocation of overhead cost is accomplished by selecting an allocation base that is common to all of the company's products and services. An allocation base is a measure such as direct labor hours or machine hours that is used to assign overhead costs to products and services. The most widely used allocation bases are direct labor hours, and direct labor cost, with machine hours and even units of product (where a company has only a single product) also used to some extent.

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