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Companies that use job order costing often have under- or overapplied overhead. Discuss three reasons to apply overhead and explain how overhead is applied. Give two reasons why overhead might be under- or overapplied and discuss the two methods companies use to dispose of under- or overapplied overhead.
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Managerial Accounting

Managerial Accounting


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edwardssheedwardsshe
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Because overhead is not easily traceable to a particular job or product, overhead must be divided among the different jobs or products during the year. Dividing or allocating overhead to various jobs is called overhead application.
Three reasons to allocate overhead are (1) the amount of overhead actually incurred may not be known at the time a job is being worked on, (2) some overhead costs are seasonal and should be spread over production for the entire year, and (3) fixed manufacturing overhead costs are not related to the number of units products and should be spread among all units produced.
Overhead is applied using a predetermined overhead rate. The rate is calculated by dividing the estimated overhead costs for the period by the total estimated application base. Reasons why overhead does not equal actual overhead might be that the estimated overhead failed to include some items that would be incurred or included some items that should not be incurred, the application base was not appropriate (did not drive overhead costs), or that unexpected actual overhead occurred. If manufacturing overhead is overapplied or underapplied, the balance is closed at the end of the period by increasing or decreasing Cost of Goods Sold if the amount is insignificant, or prorated among Work in Process, Finished Goods, and Cost of Goods Sold if the amount is large.

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