4. When overhead is applied using a predetermined rate based on ma-
chine-hours, it is assumed that overhead cost is proportional to ma-
chine-hours. So when the actual machine-hours turn out to be 75,000,
the costing system assumes that the overhead will be 75,000 machine-
hours × $2.40 per machine-hour, or $180,000. This is a drop of $12,000
from the initial estimated manufacturing overhead cost of $192,000.
However, the actual manufacturing overhead did not drop by this much.
The actual manufacturing overhead was $184,000—a drop of $8,000
from the estimate. The manufacturing overhead did not decline by the
full $12,000 because of the existence of fixed costs and/or because
overhead spending was not under control. These issues will be covered
in more detail in later chapters.
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