Final answer:
To allocate manufacturing overhead to individual jobs, a cost driver that accurately reflects the use of resources is needed, such as machine hours or labor hours, depending on whether the production is more automated or labor-intensive.
Step-by-step explanation:
Allocating manufacturing overhead to individual jobs is crucial for accurately costing products and services, essential in managerial accounting. The key is to use a cost driver that reliably reflects the use of overhead resources for each job. For instance, if production technology has evolved to favor automation, a firm might allocate overhead based on machine hours rather than labor hours. Analyses show that a shift towards more machinery and less labor, such as using production technology 3, could be more cost-effective when machine costs are lower. On the contrary, if the cost of machinery increases, the firm might shift towards labor-intensive technology, as in production technology 2, to minimize costs.
These decisions echo the fundamental economic questions of what should be produced, how it should be produced, and for whom it should be produced. They are determined by the costs and efficiency of the available production technologies, which in turn affects the manufacturing overhead allocation method.
For example, in a lumber operation using a traditional two-person crosscut saw, labor costs might dominate overhead, making labor hours a reasonable cost driver. As technologies evolve, the most efficient and cost-effective method of overhead allocation may change, highlighting the importance of flexible and responsive accounting practices in the manufacturing industry.