Allocating Manufacturing Overhead: Videos & Practice Problems
Allocating Manufacturing Overhead assigns indirect costs to jobs based on an activity base and each job’s activity use, rather than splitting overhead evenly. Common activity bases include machine hours, labor hours, production cycles, ride cycles, operating room hours, or procedure count. A good activity base measures production in a way that reflects the work required, helping overhead follow actual resource consumption.
The key tool is the predetermined overhead rate, an estimated rate calculated before production begins: \(\text{Predetermined overhead rate}=\frac{\text{Estimated total manufacturing overhead}}{\text{Estimated total activity base}}\). To apply overhead to a job, multiply that rate by the job’s actual activity use. Applied overhead is then combined with direct materials and direct labor to determine total job cost and unit cost.
Activity Base & Activity Use
Activity Base & Activity Use
Oak-ay Furniture Company uses a job order costing system to track the cost of each piece of furniture it builds. To fully understand its costs, the company wants to use an activity base that reflects the work required for each job.
Which of the following would be the most appropriate activity base?
Number of employees in the company.
Direct labor hours spent on each job.
The color of the wood stain used.
The number of furniture stores in the city.
Allocating Overhead & Predetermined Overhead Rate
Allocating Overhead & Predetermined Overhead Rate
Prisca’s Print Shop plans to calculate a predetermined overhead rate using machine hours as the activity base.
Managers estimate the following manufacturing overhead costs for the month:
The printing facility lease will cost \$48,000, utilities for the presses are expected to be \$12,000, maintenance for the printing equipment will cost \$9,000, and the factory supervisor’s salary will be \$21,000. The company expects its printing machines to operate 4,500 machine hours during the month.
What is the predetermined overhead rate per machine hour?
\$10 per machine hour.
\$15 per machine hour.
\$20 per machine hour.
\$30 per machine hour.
Applying Overhead & Calculating Total Job Cost & Unit Cost
Applying Overhead & Calculating Total Job Cost & Unit Cost
Prisca’s Print Shop applies manufacturing overhead using a predetermined overhead rate of \(20 per machine hour.
The company is currently calculating the unit cost for Job #204, which involves printing 500 custom event posters for a local business. Job #204 will require 120 machine hours. It will also incur the cost of specialty paper of \)1,200, as well as ink and printing plates of \$300. Direct labor on this job is estimated to cost \$2,000.
Using the company’s predetermined overhead rate, what is the unit cost to produce one poster in Job #204?
\$6.40 per poster.
\$11.80 per poster.
\$13.00 per poster.
\$14.80 per poster.
Here's what students ask on this topic:
An activity base is a measurable factor used to allocate manufacturing overhead costs to products or jobs. It represents the type of activity that drives overhead costs, such as machine hours, labor hours, production cycles, or other relevant measures depending on the company. For example, a vehicle manufacturer might use machine hours, while a hospital might use operating room hours. The key is that the activity base should reflect the production activity over time and be relevant to the indirect costs incurred. Choosing the right activity base helps ensure overhead is allocated fairly and accurately to each job based on its actual use of resources.
The predetermined overhead rate is calculated before production begins to estimate how much overhead cost will be assigned per unit of the activity base. The formula is: . For example, if estimated overhead is \$120,000 and estimated machine hours are 6,000, the predetermined overhead rate is \$20 per machine hour. This rate is then used to apply overhead costs to jobs based on their actual activity use.
To apply overhead to a job, multiply the predetermined overhead rate by the actual amount of the activity base used by that job. The formula is: . For example, if the predetermined overhead rate is \$20 per machine hour and a job uses 50 machine hours, the applied overhead is \$1,000. This method ensures overhead costs are assigned based on the job's consumption of resources rather than evenly splitting costs.
To calculate the total cost of a job, add the applied overhead to the direct materials and direct labor costs. The formula is: . For example, if applied overhead is \$1,000, direct materials are \$2,000, and direct labor is \$1,500, the total job cost is \$4,500. This total cost helps in pricing decisions and understanding the full cost of production.
After calculating the total job cost, divide it by the number of units produced to find the cost per unit. The formula is: . For example, if the total job cost is \$4,500 and 500 units are produced, the cost per unit is \$9. This cost per unit is essential for setting prices and evaluating profitability.
