Actual manufacturing overhead costs traced to jobs just as direct materials and direct labor costs are traced to jobs
- Job order Costing: It is a method of cost accounting, in which cost is collected and accumulated for each job, work order, or project separately. Especially the job order costing is followed in organizations where customized goods are produced.
- The cost of goods manufactured incurred in each job, or project, work order are determined in the Good Manufactured Schedule.
- Cost of goods manufactured Schedule: The cost of goods manufactured is calculated in a statement. For the calculation of cost of goods manufactured it takes the beginning and ending work in process, direct materials, direct labor, and manufacturing overhead into consideration.
- Beginning work-in process: It refers to the units that are yet to be converted into finished goods. It belongs to the previous period’s closing balance that is shown as beginning balance for the current period.
- Ending work-in process: It refers to units that could not converted into the finished goods in the current period.
- Direct materials: Direct materials are the raw materials which are directly related with the production of the goods.
- Direct labor cost: The labor cost includes the wages or salaries paid to employees who physically produce goods or services. Labor refers to the actual work that the employees do to produce products. Labor costs refer to the amount of money that the employer pays the employees to complete the work.
- Manufacturing Overhead costs: The costs, which do not relate directly with the manufacturing of products, are referred to as manufacturing overhead costs or indirect costs.
- Units of Production: It refers the number of units produced during a particular period of time that are ready for sales.
Step: 1
- Tracing is the process of identifying the material or labour costs with a product. Material and labour costs are direct costs which are directly traced to a product. Manufacturing overhead is an indirect cost which cannot be specifically identifiable with the product.
Explanation:
- The actual manufacturing overhead costs are not traced to jobs like direct materials and direct labour costs are traced because it is very difficult and expensive to find out in a precise manner, the accurate amount of manufacturing overhead cost that has contributed towards each unit of production.
Hint:
- Based on definition explained and data given, an example is provided to explain the reason.
Step: 2
- Example: It is too difficult for a cost accountant to calculate what amount of plant manager’s salary or rent or electricity should be allocated to each unit produced in the factory.
- Manufacturing Overhead costs are indirect costs that are not directly involved in the production activities however, it helps in completing the production process. Thus, manufacturing overhead costs are never calculated on per unit basis rather the entire amount of cost is taken into consideration.
Actual manufacturing overheads are difficult to trace to individual jobs and expensive to allocate.
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