Question

Total manufacturing costs contains manufacturing costs applied, not actual manufacturing costs incurred. The application of job order costing may result in over-applied or underapplied overhead because of differences in applied and actual manufacturing overhead. What is the reason for over-applied or underapplied overhead in job order costing?

1) Differences in applied and actual manufacturing costs
2) Differences in total manufacturing costs
3) Differences in job order costing
4) Differences in overhead costs

Answer 1

Over-applied or underapplied overhead in job order costing is caused by differences between estimated (applied) and actual overhead costs, which can occur due to changes in production factors.

Step-by-step explanation:

In job order costing, over-applied or underapplied overhead occurs when there are differences between the applied and actual manufacturing overhead costs. This can happen for various reasons, such as changes in production volume or unexpected fluctuations in the prices of overhead items. For example, if a company applies $10,000 of manufacturing overhead to a job but the actual overhead cost incurred is only $8,000, there would be an over-applied overhead of $2,000.

The reason for over-applied or underapplied overhead in job order costing arises from the differences in applied and actual overhead costs. Since job order costing involves estimating overhead costs before the production starts, the actual costs incurred may not always match these estimates. If the applied (estimated) costs are greater than the actual costs, this results in over-applied overhead. Conversely, if the actual costs exceed estimated costs, it leads to underapplied overhead. This discrepancy can be due to various factors, such as changes in production volume, labor efficiency, material prices, or any changes in the cost of utilities.