EXERCISE 8-12 (CONTINUED)

2. The table prepared in part (1) above allows two different perspectives

on the overhead cost of the order. The column totals that appear in the

last row of the table tell us the cost of the order in terms of the activi-

ties it required. The row totals that appear in the last column of the ta-

ble tell us how much the order cost in terms of the overhead accounts

in the underlying accounting system. Another way of saying this is that

the column totals tell us what the costs were incurred for . The row to-

tals tell us what the costs were incurred on . For example, you may

spend money on a chocolate bar in order to satisfy your craving for

chocolate. Both perspectives are important. To control costs, it is neces-

sary to know both what the costs were incurred for and what actual

costs would have to be adjusted (i.e., what the costs were incurred on).

The two different perspectives can be explicitly shown as follows:

What the overhead costs were incurred on :

Manufacturing:

Indirect labor ... R1,950

Factory depreciation ... 1,760

Factory utilities... 24

Factory administration ... 180

General selling & administrative:

Wages and salaries... 1,780

Depreciation ... 92

Taxes and insurance... 40

Selling expenses... 400

Total overhead cost ... R6,226

What the overhead costs were incurred for :

Order size ... R3,370

Customer orders ... 320

Product testing ... 356

Selling... 2,180