ACCT 20200 Chapter 3: Sections 3.2 (continued) and 3.3

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7 Feb 2017
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Chapter 3: Job-Order Costing
Overhead Application: the process of assigning overhead cost to jobs throughout the
period
o Example:
If the predetermined overhead rate is $8 per direct labor hour, then $8 of
overhead cost is applied to a job for each direct labor-hour incurred on
the job
o Equation:
o Actual overhead costs are NOT assigned to jobs if that could be done, the
costs would be direct costs, not overhead
As a result, the overhead that is assigned to the job is simply a share of
the total overhead that was estimated at the beginning of the year
o Example= think about the differences in season and the cost of heating in the
factory, which is part of manufacturing overhead
Two identical jobs, one completed in the winter and one completed in
the spring, would be assigned different manufacturing overhead costs
Normal Cost System:
o Applies overhead to jobs by multiplying a predetermined overhead rate by the
actual amount of the allocation base incurred by the jobs
Cost Driver:
o A factor, such as machine-hours, beds occupied, computer time, or flight-hours,
that causes overhead costs
o Ideally, the allocation base in the predetermined overhead rate should DRIVE the
overhead cost
o Direct labor has decreased relative to overhead as a component of product costs
Think about changes in technology
o In companies where direct labor and overhead costs have been moving in
opposite directions, it is difficult to argue that direct labor drives overhead
costs
As a result, some companies use activity-based costing
This is designed to more accurately reflect the demands that products,
customers, and other cost objects make on overhead resources
o KEY IDEA:
The allocation base used by the company should DRIVE, or cause,
overhead costs, and direct labor is NOT always the most appropriate
allocation base
Once manufacturing overhead is costed, the job cost sheet is complete except for two
final steps:
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