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ACC560 Case 1 ANSWERS - Week 2 Case 1 Greetings Inc Job...

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Week 2 Case 1: Greetings Inc.: Job Order Costing Course: Managerial Accounting (ACC 560) 1 . Define and explain the meaning of a predetermined manufacturing overhead rate that is applied in a job-order costing system. Answer: 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 divided by 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 for apply overhead costs to jobs. In this case of Wall Décor, each product is allocated an amount of manufacturing overhead, based on the cost of the print. In sum, the formula for the predetermined overhead rate is: Estimated Annual Overhead Costs ÷ Expected Annual Operating Activity = Predetermined Overhead Rate 2. What are the advantages and disadvantages of using the cost of each print as a manufacturing overhead cost driver? 1
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Answer: Advantage: (1.)Manufacturing overhead costs will be more accurate. The reason is that more expensive prints would be more likely to be framed, and that the processing of framing requires the incurrence of considerably more overhead costs. Thus, at the same volume level, manufacturing overhead costs are assigned more to framed prints than to unframed prints.
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