Question

Manufacturing overhead is applied to each job

a) At the end of the year when actual costs are known.
b) Only if the overhead costs can be directly traced to that job.
c) At the time when the overhead cost is incurred.
d) By means of a predetermined overhead rate.

Answer 1

Manufacturing overhead is applied to each job by means of a predetermined overhead rate. This rate is calculated by dividing the estimated manufacturing overhead costs by a chosen cost driver.

Step-by-step explanation:

In manufacturing, overhead refers to indirect costs that cannot be directly traced to a specific product or job. Manufacturing overhead is applied to each job by means of a predetermined overhead rate.

Option (d) 'By means of a predetermined overhead rate' is the correct answer. A predetermined overhead rate is calculated by dividing the estimated manufacturing overhead costs by a chosen cost driver, such as direct labor hours or machine hours. This rate is then used to allocate manufacturing overhead to each job based on the estimated usage of the cost driver.

For example, if the estimated manufacturing overhead for a year is $100,000 and the chosen cost driver is direct labor hours, and if a particular job requires 10 hours of direct labor, then the manufacturing overhead applied to that job would be $10,000 (10 hours x predetermined overhead rate).