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Analysis of Job Order Costing and Manufacturing Overhead Allocation at Wall D�cor

An analysis of job order costing and the allocation of manufacturing overhead at Wall D�cor.

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    1 Analysis of Job Order Costing and Manufacturing Overhead Allocation at Wall Décor Case 1 . G reetings Inc. Job Order Costing 1. Define and explain the meaning of a predetermined manufacturing overhead rate that is applied in a job - order costing system. I n a job order costing system, the actual direct materials and direct labor cost to particular jobs, can be allocated directly by the company. Although the overhead costs of production cannot be allocated to particular jobs on the base of the actual costs incurred. This s because the production overhead relates to the production process in total and also that the actual overhead costs are not known until after the entire process is complete. Hence, production overhead costs are calculated on a estimation basis using predetermined production overhead rates. Companies approximate the total overhead costs at the start of the year, the level of business and come up with a predetermined overhead rate based on these approximations. The rate that is applied to the work process inventory and to particular jobs, is called the A predetermined manufacturing overhead rate, which is calculated by dividing the estimated annual overhead costs by the expected annual operating activity , and can be expressed in terms of a common activity base. Direct labor costs, direct labor hours, machine hours, production units, or any other measure that can provide an equitable basis for apply overhead costs to jobs are a few common activity bases that can be used to make calculations. With reference to the Wall Décor case, every product id given an amount of manufacturing overhead on the basis of the cost of the print.

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    2 Hence the predetermined overhead rate can be calculated using the formula: Estimated Annual Overhead Costs ÷ Expected Annual Operating Activity = Predetermined Overhead Rate 2. What are the advantages and disadvantages of using the cost of each print as a manufacturing overhead cost driver? Advantage: (1.) The accuracy of the manufacturing overhead costs will be more precise. The reason being that, the more costly prints would be more likely to be used for framing, and also that incurrence overhead costs is significantly more in the process of framing. Hence manufacturing overhead costs are assigned more to framed prints than to unframed prints eve at the same level of volume. Also this is done on the basis of the forecasted volume of units that are sold. Hence the products that are manufactured in higher volumes are assigned more overhead costs. (2.) The use of the cost that is incurred on each print as a manufacturing overhead cost driver is comparatively cheaper to employ in a business and is easier to explicate, as every product has its expense of the print and this expense of each print is relatively easier to get. Disadvantage: (1.) The forecasting of how many of each product will be sold is very closely related to the use of the cost of each print as a manufacturing overhead cost driver. This forecasting can be inaccurate.

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