ACCT20200 Chapter 3: Sections 3.2 (continued) and 3.3
Document Summary
Overhead application: the process of assigning overhead cost to jobs throughout the. Two identical jobs, one completed in the winter and one completed in the spring, would be assigned different manufacturing overhead costs. Normal cost system: applies overhead to jobs by multiplying a predetermined overhead rate by the actual amount of the allocation base incurred by the jobs. Cost driver: a factor, such as machine-hours, beds occupied, computer time, or flight-hours, that causes overhead costs. Ideally, the allocation base in the predetermined overhead rate should drive the overhead cost: direct labor has decreased relative to overhead as a component of product costs. In companies where direct labor and overhead costs have been moving in opposite directions, it is difficult to argue that direct labor (cid:862)drives(cid:863) 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: key idea:
