either of these as a base for allocating overhead is quite simple. Machine hours can also be easily measured by placing an hour meter on each machine if one does not already exist. Why Use a Predetermined Overhead Rate? Question: The use of a predetermined overhead rate rather than actual data to apply overhead to jobs is called normal costing . Most companies prefer normal costing over assigning actual overhead costs to jobs. Why do most companies prefer to use normal costing? Answer: Companies use normal costing for several reasons: Actual overhead costs can fluctuate from month to month, causing high amounts of overhead to be charged to jobs during high-cost periods. For example, utility costs might be higher during cold winter months and hot summer months than in the fall and spring seasons. Maintenance costs might be higher during slow periods. Normal costing averages these costs out over the course of a year.
Saylor URL: Saylor.org 91 Actual overhead cost data are typically only available at the end of the month, quarter, or year. Managers prefer to know the cost of a job when it is completed — and in some cases during production — rather than waiting until the end of the period. The price charged to customers is often negotiated based on cost. A predetermined overhead rate is helpful when estimating costs. Bookkeeping is simplified by using a predetermined overhead rate. One rate is used to record overhead costs rather than tabulating actual overhead costs at the end of the reporting period and going back to assign the costs to jobs. Using a Manufacturing Overhead Account Question: Using a predetermined overhead rate to apply overhead costs to jobs requires the use of a manufacturing overhead account. How is the manufacturing overhead account used to record transactions? Answer: The manufacturing overhead account tracks the following two pieces of information: First, the manufacturing overhead account tracks actual overhead costs incurred. Recall that manufacturing overhead costs include all production costs other than direct labor and direct materials. The actual manufacturing overhead costs incurred in a period are recorded as debits in the manufacturing overhead account. For example, assume Custom Furniture Company places $4,200 in indirect materials into production on May 10. The journal entry to reflect this is as follows: Other examples of actual manufacturing overhead costs include factory utilities, machine maintenance, and factory supervisor salaries. All these costs are recorded as debits in the manufacturing overhead account when incurred. Second, the manufacturing overhead account tracks overhead costs applied to jobs. The overhead costs applied to jobs using a predetermined overhead rate are recorded as credits in the
Saylor URL: Saylor.org 92 manufacturing overhead account. You saw an example of this earlier when $180 in overhead was applied to job 50 for Custom Furniture Company. We repeat the entry here.
- Fall '14
- Managerial Accounting