Note re applying Overhead to a Product

Note re applying Overhead to a Product - 1 Supplementary...

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1 Supplementary Note on Applying Overhead to a Product While it is worthwhile to keep track of Direct Materials and Direct Labour as separate amounts (because these are significant and directly traceable to the product), the same is not true for Manufacturing Overhead. These items only have an indirect relationship to the product. In chapter 2, we used an Actual Cost System and accumulated all of the actual charges for manufacturing overhead items in an account called Mfg. Overhead (MO). However, if we completed a job every few days, we would have to wait until all bills for the actual overhead costs had been received before we could get all the charges in the job. Some bills like property taxes on the factory might not be received for several months. Hence, the job would not be able to be released to the customer until all the bills relating to the overhead costs were in. This could take months and would cause intolerable delays in shipping the goods to the customer and in receiving payment from the customer. In addition, because MO items have only an indirect relationship to the product, each MO item would have to be allocated on some arbitrary basis to get an appropriate amount of cost charged to each job or product. For example, how would you determine how much of the lighting bill for electricity should be charged to the manufacture of a wooden table? You would need an army of accountants to do all the allocations of mfg. overhead items to all of the jobs. This would be time consuming and impractical. Therefore, for these reasons, some other method was needed to get the MO costs charged into the job or product. The method that was universally selected was to use a Pre-determined Overhead rate that would be estimated at the beginning of the year . Pre-determined MO rate = Estimated Mfg Overhead in $ (for all items) Estimated units of an allocation base In order to ensure that the overhead rate could be charged to all products, we need to use an allocation base that is common to all types of products (assuming many companies have multiple products). If you use # of units of product, you can only have one product type because you are only allowed one divisor for the rate calculation. Therefore the allocation bases that are common to all types of products are: Direct Labour Hours (rate per DLH) Diret Labour Cost in $ (rate per DL$)
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This note was uploaded on 03/03/2012 for the course ACCT 2460 taught by Professor Farrar during the Winter '12 term at Conestoga.

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Note re applying Overhead to a Product - 1 Supplementary...

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