Wize University Managerial Accounting Textbook > Job-Order Costing
Applying Manufacturing Overhead
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The Predetermined Overhead Rate
What is it?
- Rate used to estimate how much overhead is being used in the production.
- Computed at the beginning of a period and is based on estimates.
- Since overhead does not have a unit, it is applied based on some other unit, this unit is called the cost driver.
- Most common: direct labour cost, direct labour hours, machine hour.
- When overhead is estimated using the predetermined overhead rate, this is called Applied Manufacturing Overhead
How to Use it
- Multiply predetermined overhead rate by the actual use of the specific cost driver.
- Same method is used to apply overhead to a single job or to an entire period.
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Example: Applying Overhead to a Job
ABC Inc. estimates that it will spend $1,000,000 on manufacturing overhead during 2020. It applies overhead on the basis of Direct Labour hours. It expects to spend $500,000 on direct labour in 2020. The company pays its workers $25 per hour.
During the year, Job #55 was started and completed. The job required $10,000 of direct materials and 20 hours of labour. What is the total cost of the job.
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Applying Overhead to a Period
ABC Inc. estimates that it will spend $1,000,000 on manufacturing overhead during 2020. It applies overhead on the basis of Direct Labour Cost. It expects to spend $500,000 on direct labour in 2020. The company pays its workers $35 per hour. At the end of the year, a total of 13,000 direct labour hours had been worked.
How much overhead was applied during 2020?
Practice: Applying Overhead to a Job
Wize Corp. estimated that manufacturing overhead will total $2,000,000 during 2022. The company applies overhead on the basis of labor hours and expects to use a total of 20,000 labor hours during 2022.
In March of 2022, the company was hired to complete a job for a customer, this job was assigned the title Job #301. To complete the job, the company used $23,000 of direct materials; 7 employees each worked 20 hours on the job, employees earn an average hourly salary of $29.
Practice: Applying Overhead to a Period
Wize Corp. estimated that manufacturing overhead will total $2,000,000 during 2022. The company applies overhead on the basis of labor hours and expects to use a total of 20,000 labor hours during 2022.
On December 31st, 2022 the company's records indicated that employees had worked a total of 23,578 hours during the year. How much overhead was applied during 2022?