1. Lecture 11

2. Lecture 10 Types of Costing Systems Used to Determine Product Costs
Job-Order Costing
Process Costing
Sequence of Events in a Job-Order Costing System

3. Application of Manufacturing Overhead
The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.
Estimated total manufacturing overhead cost for the coming period
Estimated total units in the allocation base for the coming period
POHR =
Ideally, the allocation base is a cost driver that causes overhead.

4. Application of Manufacturing Overhead
Based on estimates, and determined before the period begins.
Overhead applied = POHR × Actual activity
Actual amount of the allocation base such as units produced, direct labor hours, or machine hours incurred during the period.

5. Application of Manufacturing Overhead
Recall the wooden crate example where:
Overhead applied = $4 per DLH × 8 DLH = $32
Overhead applied = POHR × Actual activity

6. The Need for a Predetermined Manufacturing Overhead Rate
Using a predetermined rate makes it possible to estimate total job costs sooner.
Actual overhead for the period is not known until the end of the period.

7. Note
If we wait until the end of the period, we will know the actual TOTAL overhead cost. However, still we won’t know the actual overhead cost of a particular job. Why?
Overhead consists of costs that are either difficult or impossible to trace to particular jobs.
Difficult-to-trace costs include the cost of indirect materials like glue in a furniture factory.
Impossible-to-trace costs include fixed common costs like the property taxes on the factory building and land.

8. Overhead Application Example
PearCo applies overhead based on direct labor hours. Total estimated overhead for the year is $640,000. Total estimated labor cost is $1,400,000 and total estimated labor hours are 160,000. What is PearCo’s predetermined overhead rate per hour?

9. Overhead Application Example
Estimated total manufacturing overhead cost for the coming period
Estimated total units in the allocation base for the coming period
POHR =
$640,000
160,000 direct labor hours (DLH)
POHR =
POHR = $4.00 per DLH
For each direct labor hour worked on a job, $4.00 of factory overhead will be applied to the job.

10. Overhead Application Example

11. Overhead Application Example

12. MCQs Test
If the number of wooden crates in the order on the previous page is increased or decreased by one unit, what would you expect to happen to the total spending of PearCo?
a. Total spending would probably change by less than $105.
b. Total spending would probably change by about $105.
c. Total spending would probably change by more than $105.

13. MCQs Test
If the number of wooden crates in the order on the previous page is increased or decreased by one unit, what would you expect to happen to the total spending of PearCo?
a. Total spending would probably change by less than $105.
b. Total spending would probably change by about $105.
c. Total spending would probably change by more than $105.
Total spending would change by $105 only if all of the costs were variable with respect to the number of units produced. Direct materials is variable, but much of the overhead and perhaps even direct labor may be fixed.

14. MCQs Test
Job WR53 at Pharmo Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?
a. $200.
b. $350.
c. $380.
d. $730.

15. MCQs Test
Job WR53 at Pharmo , Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 20,000. What would be recorded as the cost of job WR53?
a. $200.
b. $350.
c. $380.
d. $730.

16. MCQs Test
Job WR53 at Pharmo , Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 19,000. What would be recorded as the cost of job WR53?
a. $200.
b. $350.
c. $750.
d. $730.

17. MCQs Test
Job WR53 at NW Fab, Inc. required $200 of direct materials and 10 direct labor hours at $15 per hour. Estimated total overhead for the year was $760,000 and estimated direct labor hours were 19,000. What would be recorded as the cost of job WR53?
a. $200.
b. $350.
c. $750.
d. $730.

18. MCQs Test
If overhead contains fixed costs, what will happen to the predetermined overhead rate if lower unit sales volume is expected?
a. The predetermined overhead rate will likely increase.
b. The predetermined overhead rate would be unaffected.
c. The predetermined overhead rate will likely decrease.

19. MCQs Test
If overhead contains fixed costs, what will happen to the predetermined overhead rate if lower unit sales volume is expected?
a. The predetermined overhead rate will likely increase.
b. The predetermined overhead rate would be unaffected.
c. The predetermined overhead rate will likely decrease.

20. MCQs Test
If overhead contains fixed costs and management set prices by marking up product costs by a preset percentage, what will happen to selling prices if lower unit sales volume is expected?
a. Selling prices will likely increase.
b. Selling prices would be unaffected.
c. Selling prices will likely decrease.

21. MCQs Test
If overhead contains fixed costs and management set prices by marking up product costs by a preset percentage, what will happen to selling prices if lower unit sales volume is expected?
a. Selling prices will likely increase.
b. Selling prices would be unaffected.
c. Selling prices will likely decrease.

22. MCQs Test
If selling prices increase, what will happen to unit sales volume?
a. Unit sales volume will likely increase.
b. Unit sales volume would be unaffected.
c. Unit sales volume will likely decrease.

23. MCQs Test
If selling prices increase, what will happen to unit sales volume?
a. Unit sales volume will likely increase.
b. Unit sales volume would be unaffected.
c. Unit sales volume will likely decrease.

24. Budgeted Sales Revenue Rs. 205000 Actual Manufacturing overhead 340000
Budgeted Machine Hour
10000
Budgeted direct labour hour
20000
Budgeted Direct labour rate
Rs. 14
Budgeted Manufacturing overhead Rs
Actual machinge hours
11000
Actual direct labour hours
18000
Actual direct labour rate
Rs. 15
Compute the firm’s predetermined overhead rate for the year using each of the following commons cost drivers: a) Machine hours, b) Direct labor hours, c) direct labor rupees.
Calculate the over/under applied FOH for the year suing each of the cost drivers listed above.

27. End of Lecture 11