2 the actual activity base machine hours does not

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2. The actual activity base (machine hours) does not equal the estimated activity base used to compute the predetermined overhead rate. Example: Calculate the amount of overhead allocated to the products of a company that has a predeter- mined overhead rate of $10 per machine hour if machines were used for 10,000 hours. (Answer: $100,000) What if the company actually spent $95,000 on overhead costs? Overapplied overhead by 5,000 dollars -Allocate some to cost of good sold and fixed ending inventory with revised over head rate. If the difference is an insignificant amount, the amount of over or underapplied overhead is just moved to “Cost of goods sold” and will either increase or decrease the expense. If the difference is a significant amount, then usually the company will want to investigate why there was an error and possibly adjust pricing of items still in inventory. The goal of this objective is to explore the ways job cost information is used in decision making. Types of issues to explore: -Why are material cost higher ?(sometimes we buy cheaper material that actually cost more per unit) -Why are direct labor hours higher than expected ? -Why are overhead cost higher or lower than expected? Possible reasons for problems: -Inexperienced workers (untrained) -Poor quality of materials 12-7
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Chapter 12 - Cost Accumulation, Tracing, and Allocation -tools or machinery that is in constant need of repairs -carelessness by employees -incorrect instructions( more waste or scrap) 12-8
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