Final answer:
Manufacturing overhead applied in a job-order costing system is recorded as an increase to the Work In Process inventory. Variable costs, including labor and raw materials, increase with the level of output, and manufacturing overhead is applied to jobs using a predetermined rate.
Step-by-step explanation:
In a job-order costing system, manufacturing overhead applied is recorded as an increase to Work In Process inventory. This method is used to allocate overhead costs to specific jobs or orders, which includes both variable costs and fixed costs. Variable costs, such as labor and raw materials, vary with the level of output. As more goods or services are produced, these costs increase, since producing more output typically means that more workers or work hours, as well as greater quantities of raw materials, are needed. This idea follows the principle that with higher quantities of output, a firm will incur higher costs, as more inputs with associated costs are necessary for production. In the context of job-order costing, overhead application is crucial to ensure that all costs associated with production are accounted for when determining the cost of each job.
It's important to note that while direct labor and raw materials can often be traced directly to jobs and are classified as variable costs, manufacturing overhead is usually applied using a predetermined rate based on estimated costs and activity levels. Once the overhead is applied, the Work In Process (WIP) Inventory account is debited to reflect the increase.