Charge that overhead is largely unrelated to or even

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charge that overhead is largely unrelated to, or even negatively correlated with, machine-hours or direct labor-hours.) In the costing system illustrated in the chapter, a predetermined overhead rate is computed by dividing the estimated total overhead for the upcoming period by the estimated total amount of the allocation base. c. Ideally overhead cost should be strictly proportional to the allocation base; in other words, an x% change in the allocation base should cause an x% change in the overhead cost. Only then will the allocated overhead costs be useful in decision-making and in performance evaluation. However, much of the overhead typically consists of costs that are not proportional to any conceivable allocation base and hence any scheme for allocating such costs will inevitably lead to costs that are biased and unreliable for decision-making and performance evaluation. In practice, the overriding concern is to select some basis or bases for allocating all overhead costs and scant attention is paid to questions of causality. These issues are not raised in the text at this point since students will not be ready to understand them until after having studied cost behavior in more depth in later chapters. d. At any rate, the actual amount of the allocation base incurred by a job is recorded on the job cost sheet. The actual amount of the allocation base is then multiplied by the predetermined overhead rate to determine the amount of overhead that is applied to the job. 11
MANAGERIAL ACCOUNTING - IIE 211 CLASS 4 C. Job Order Costing—The Flow of Costs . (Exercises 3-4, 3-10, 3-13, 3-14, 3-15, and 3-17.) Exhibit 3-14 in the text provides a model for the cost flows in a job-order costing system. 1. Overview of Cost Flows. The basic flow of costs in a job-order system begins by recording the costs of material, labor, and manufacturing overhead. a. Direct material and direct labor costs are debited to the Work In Process account. Any indirect material or indirect labor costs are debited to the Manufacturing Overhead control account, along with any other actual manufacturing overhead costs incurred during the period. Manufacturing overhead is applied to Work In Process using the predetermined rate. The offsetting credit entry is to the Manufacturing Overhead control account. b. The cost of finished units is credited to Work In Process and debited to the Finished Goods inventory account. c. When units are sold, their costs are credited to Finished Goods and debited to Cost of Good Sold. 2. The Manufacturing Overhead Control Account. Manufacturing Overhead is a temporary control account. a. As stated above, actual overhead costs are recorded on the debit side of the Manufacturing Overhead control account. Overhead costs applied to Work in Process using predetermined rates are recorded on the credit side of the account. b. Any discrepancy between overhead costs incurred and overhead costs applied shows up as a balance in the Manufacturing Overhead control account at the end of the period. A

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