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When are Job-order costing systems used?

- Many different products are produced each period.
- Products are manufactured to order.
- The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.


Why use an Allocation Base?

We use an allocation base because:
- It is impossible or difficult to trace overhead costs to particular jobs.
- Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager’s salary.
- Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.


Why use a Predetermined Overhead Rate (POHR)?

- Actual overhead for the period is notknown until the end of the period, thus inhibiting the ability to estimate job costs during the period.

- Actual overhead costs can fluctuate seasonally, thus misleading decision makers.


What is a Plantwide Overhead Rate?

Many companies use a single predetermined plantwide overhead rate to allocate all manufacturing overhead costs to jobs based on their usage of direct-labor hours.
- It is often overly-simplistic and incorrect to assume that direct-labor hours is a company’s only manufacturing overhead cost driver.
0 If more than one overhead cost driver can be identified, job cost accuracy is improved by using multiple predetermined overhead rates.


What is Activity Based Costing?

When a company creates overhead rates based on the activities that it performs, it is employing an approach called activity-based costing.

Activity-based costing is an alternative approach to developing multiple predetermined overhead rates. Managers use activity-based costing systems to more accurately measure the demands that jobs, products, customers, and other cost objects make on overhead resources.