Analysis of Job Order Costing and Manufacturing Overhead Allocation at Wall D�cor

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1Analysis of Job Order Costing and Manufacturing Overhead Allocation atWall DécorCase 1.Greetings Inc. Job Order Costing1. Define and explain the meaning of a predetermined manufacturing overhead rate that isapplied in a job-order costing system.In a job order costing system, the actual direct materials and direct labor cost to particular jobs,can be allocated directly by the company. Although the overhead costs of production cannot beallocated to particular jobs on the base of the actual costs incurred. This s because the productionoverhead relates to the production process in total and also that the actual overhead costs are notknown until after the entire process is complete. Hence, production overhead costs are calculatedon a estimation basisusing predetermined production overhead rates. Companies approximatethe total overhead costs at the start of the year, the level of business and come up with apredetermined overhead rate based on these approximations.The rate that is applied to the work process inventory and to particular jobs, is called the Apredetermined manufacturing overhead rate, which is calculated by dividing the estimated annualoverhead costs by theexpected annual operating activity, and can beexpressed in terms of acommon activity base. Directlabor costs, direct labor hours, machine hours, production units, orany other measure that can provide an equitable basis for apply overhead costs to jobs are a fewcommon activity bases that can be used to make calculations. With reference to theWall Décorcase, every product id given an amount of manufacturing overhead on the basis of the cost of theprint.

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2Hence the predetermined overhead rate can be calculated using the formula:Estimated Annual Overhead Costs÷Expected Annual Operating Activity= Predetermined Overhead Rate2. What are the advantages and disadvantages of using the cost of each print as amanufacturing overhead cost driver?Advantage:(1.)The accuracy of the manufacturing overhead costs will be more precise. The reason beingthat, the more costly prints would be more likely to be used for framing, and also thatincurrence overheadcostsissignificantly more inthe processofframing.Hencemanufacturing overhead costs are assigned more to framed prints than to unframed printseve at the same level of volume. Also this is done on the basis of the forecasted volumeof units that are sold. Hence the products that are manufactured in higher volumes areassigned more overhead costs.(2.)The use of the cost that is incurred on each print as a manufacturing overhead cost driveris comparatively cheaper to employ in a business and is easier to explicate, as everyproduct has its expense of the print and this expense of each print is relatively easier toget.Disadvantage:(1.)The forecasting of how many of each product will be sold is very closely related totheuse of the cost of each print as a manufacturing overhead cost driver. This forecasting canbe inaccurate.

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