Job order costing
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Job order costing allocations are done when the production process is largely automated, and products are homogenous in nature.
Manufacturing overhead is applied to inventory items based on an activity “driver.”
The Predetermined Overhead Rate (POHR) is calculated by dividing the estimated overhead incurred
during the year by the actual total amount of the driver. Overhead is then allocated by multiplying the POHR by the estimated amount of the driver for the inventory
items for the year.
Manufacturing overhead is applied to inventory items during the manufacturing process, and therefore is entered into work in process.
If manufacturing overhead is over/under-allocated during the year, the account must be closed out and netted only against ending inventory.