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What is a Predetermined Overhead Rate?A predetermined overhead rate is an allocation rate that is used to apply the estimated cost of manufacturing overhead to cost objects for a specific reporting period. This rate is frequently used to assist in closing the books more quickly, since it avoids the compilation of actual manufacturing overhead costs as part of the period-end closing process. However, the difference between the actual and estimated amounts of overhead must be reconciled at least at the end of each fiscal year. Larger organizations may employ a different predetermined overhead rate in each production department, which tends to improve the accuracy of overhead application by employing a higher level of precision. However, the use of multiple predetermined overhead rates also increases the amount of required accounting labor. How to Calculate a Predetermined Overhead RateThe predetermined rate is derived using the following calculation: Estimated amount of manufacturing overhead to be incurred in the period ÷ Estimated allocation base for the period A number of possible allocation bases are available for the denominator, such as direct labor hours, direct labor dollars, and machine hours. Example of a Predetermined Overhead RateThe controller of the Gertrude Radio Company wants to develop a predetermined overhead rate, which she can use to apply overhead more quickly in each reporting period, thereby allowing for a faster closing process. For this calculation, she uses the average manufacturing overhead cost for the past three months, and divides by the estimated amount of machine hours to be used in the current month, based on the most recent production schedule for the period. This results in $50,000 being allocated to inventory in the period. A later analysis reveals that the actual amount that should have been assigned to inventory is $48,000, so the $2,000 difference is charged to the cost of goods sold. Problems with Predetermined Overhead RatesThere are several concerns with using a predetermined overhead rate, which include are noted below. Overhead Rate is Not RealisticSince both the numerator and denominator of the calculation are comprised of estimates, it is possible that the result will not bear much resemblance to the actual overhead rate. Sales and Production Decisions are FaultyIf sales and production decisions are being made based in part on the predetermined overhead rate, and the rate is inaccurate, then so too will be the decisions. Variance Recognition ProblemsThe difference between the actual and predetermined amounts of overhead could be charged to expense in the current period, which may create a material change in the amount of profit and inventory asset reported. Weak Link to Historical CostsThe use of historical information to derive the amount of manufacturing overhead may not apply if there is a sudden spike or decline in these costs. Discuss how the predetermined factory overhead rate can be used in job order cost accounting to assist management in pricing jobs.  Q: a job order costing system, which account shows the overhead used by the company? A) manufacturing… A: In job order costing system costing is done based on different products so each product is… Q: Describe the cost equation and the difference between product costs and period costs in a job order… A: Cost equation is a mathematical way which is used by businesses to find out the cost which is… Q: Which account is used in the job order cost system to accumulate direct materials, direct labor, and… A: Click to see the answer Q: hat factors should be taken into account in deciding whether to use a job order cost system or a… A: Job Order Cost System-:Job costing pertains to the comprehensive accumulation of production expenses… Q: Provide an example of a manufacturing business that generally would use a job order cost system? A: Job order costing is a method of costing which is specific job order driven. Job Order costing… Q: How does a company decide whether to use a job order or a process cost system? A: The question is related to method of Costing. Job costing and process costing are two methods of… Q: Compare the characteristics of job costing and process costing. Consider how each method impacts the… A: Job order costing: Job order costing a method of costing used by a company t determine the cost… Q: Why must a company use predetermined overhead rates when using job order costing? A: Predetermined overhead rate is the budgeted allocation rate for estimated overheads. Predetermined… Q: Why must a company use predetermined overhead rates when using job order costing? A: Predetermined overhead rate is the budgeted allocation rate for estimated overheads. Predetermined… Q: Which characteristic is the same in both job order costing systems and process costing systems?… A: Job order costing: Job order costing is one of the methods of cost accounting under which cost is… Q: Which account is used in the job order cost system to accumulate direct materials, direct labour,… A: The job order cost system refers to the costing system where the cost is assigned and accumulated to… Q: In a job-order costing system, manufacturing overhead applied is recorded as a debit to: Work in… A: Click to see the answer Q: Describe how a job order cost system can be used for professional service businesses. A: Job order Costing: Job order costing provides a separate record of each particular quantity of… Q: Describe how a job order cost system can be used for professional service businesses. A: Click to see the answer Q: Define Job order costing system and provide one example of a business using this system. The subject… A: Job order costing is a system that takes place when customers order small, unique batches of… Q: please discuss how job order cost information is used in decision-making. What are some possible… A: Job order cost: Job order costing is a costing approach for determining the cost of producing each… Q: In a work-order costing system, what is the objective of the job cost sheet A: This question explains the objective of the job cost sheet: Q: Why is the determination of unit cost information using job order costing important in the… A: Job Costing: In job costing the Cost of Each job is determined separately. The requirement and… Q: What is the purpose of the job cost sheet in a job-order costing system? A: Job order costing system is a type of costing system in which all costs and revenues are tracked as… Q: What is the purpose of the job cost sheet in a job-order costing system? A: Job order costing system is a type of costing system in which all costs and revenues are tracked as… Q: What is the purpose of the job cost sheet in a job-order costing system? A: Job order costing system is an accounting system which is applied when unique batches of goods and… Q: What is the purpose of the job cost sheet in a job-order costing system? A: Job Costing: Job costing is a process of recording the cost on the basis of manufacturing job… Q: What is the purpose of the job cost sheet in a job-order costing system? A: Job order costing system is a type of costing system in which all costs and revenues are tracked as… Q: In job order cost accounting, the three elements of manufacturing cost are charged directly to job… A: The 3 elements of Manufacturing Costs are, (1) Direct Material (2) Direct Labor (3) Manufacturing… Q: what is the function of the Job Cost Sheet within the context of a job-order costing system? A: A job cost sheet is a document or record that lists all of the expenses associated with a specific… Q: Explain how a sales order, a production order, a materials requisition form, and a labor time… A: Click to see the answer Q: Some companies use labor cost to apply factory overhead to jobs. Identify another factor (or base) a… A: The overheads or the indirect cost must be allocated to the respective departments in order to find… Q: Discuss the reason why companies use predetermined (factory) overhead rates rather than actual… A: Manufacturing overheads are the manufacturing costs that could not be directly associated with each… Q: Discuss the reason why companies use predetermined (factory) overhead rates rather than actual… A: Definition: Actual Overhead expenses are the genuine expenses acquired and ordinarily incorporate… Q: why must a company use a predetermined overhead rates when using job order costing? A: Predetermined overhead rate is the rate determined using the estimated manufacturing overhead and… Q: Explain cost accounting and its functions as well the distinguishing features of cost accounting… A: Cost accounting is an important branch of accounting, which lays emphasis on accumulation and… Q: When using normal costing, the total production cost of a job is composed of: direct material and… A: Cost Accounting: It is the process of collecting, recording, analyzing the cost, summarizing cost,… Q: When using normal costing, the total production cost of a job is composed of direct material and… A: Cost Accounting: It is the process of collecting, recording, analyzing the cost, summarizing cost,… Q: Compute the total production cost of each job. Prepare the journal entry to transfer the cost of… A: Hello, since the student has posted multiple requirements, only the first one is answerable. Thank… Q: Identify the main difference between journal entries in process costing and job costing? A: Click to see the answer Q: Identify the main difference between journal entries in process costing and job costing? A: Process Costing: Process costing refers to a cost accounting method that is used for assigning… Q: True or false In a job costing system companies must accumulate costs and then assign costs to each… A: Under the Job costing the company accumulates the cost and thereafter assigns the cost to various… Q: Which one of the following is used by the production department supervisor to request the materials… A: Inventory or stock is a current resource on the accounting report that addresses the expenses of… Q: Prepare the journal entry to apply overhead to the manufacturing departments. A: Manufacturing overhead are the indirect manufacturing costs. For example, factory depreciation,… Q: Explain the characteristics of job order costing. A: Job order costing is that form of specific order costing which applies where the work is undertaken… Q: An accountant recently debited Work-in-Process Inventory and credited Manufacturing Overhead at a… A: The factory overhead control account requires a subsidiary ledger for factory overhead, with the… Knowledge Booster Learn more about Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below. SEE MORE QUESTIONS Recommended textbooks for you Financial & Managerial Accounting ISBN:9781285866307 Author:Carl Warren, James M. Reeve, Jonathan Duchac Publisher:Cengage Learning Managerial Accounting ISBN:9781337912020 Author:Carl Warren, Ph.d. Cma William B. Tayler Publisher:South-Western College Pub Survey of Accounting (Accounting I) ISBN:9781305961883 Author:Carl Warren Publisher:Cengage Learning Financial And Managerial Accounting ISBN:9781337902663 Author:WARREN, Carl S. Publisher:Cengage Learning, Accounting ISBN:9781337272094 Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E. Publisher:Cengage Learning, Financial & Managerial Accounting ISBN:9781337119207 Author:Carl Warren, James M. Reeve, Jonathan Duchac Publisher:Cengage Learning Financial & Managerial Accounting ISBN:9781285866307 Author:Carl Warren, James M. Reeve, Jonathan Duchac Publisher:Cengage Learning Managerial Accounting ISBN:9781337912020 Author:Carl Warren, Ph.d. Cma William B. Tayler Publisher:South-Western College Pub Survey of Accounting (Accounting I) ISBN:9781305961883 Author:Carl Warren Publisher:Cengage Learning Financial And Managerial Accounting ISBN:9781337902663 Author:WARREN, Carl S. Publisher:Cengage Learning, Accounting ISBN:9781337272094 Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E. Publisher:Cengage Learning, Financial & Managerial Accounting ISBN:9781337119207 Author:Carl Warren, James M. Reeve, Jonathan Duchac Publisher:Cengage Learning How is predetermined overhead rate used in Job Order Costing?Factory overhead costs are allocated to jobs in process using a predetermined overhead rate. The predetermined overhead rate is determined by estimating (during the budget process) total factory overhead costs and dividing these total costs by direct labor hours or direct labor dollars.
How is the predetermined overhead rate used to apply manufacturing overhead to jobs?You can calculate predetermined overhead rate by dividing the manufacturing overhead cost by the activity driver. For example, if the activity driver was machine-hours, then you would divide overhead costs by the estimated number of machine hours.
Why does Job Order cost accounting require a predetermined overhead rate?A predetermined overhead rate makes reconciling the overhead account much easier. Most often, the overhead account will reflect a credit balance or a debit balance. A credit balance indicates predetermined overhead was over-applied and a debit balance indicates predetermined overhead was under-applied.
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How the predetermined factory overhead rate can be used in job order cost accounting to assist managers in pricing jobs?
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