Question

DC Inc. has a manufacturing overhead rate of 75% of direct labor cost. What is the interpretation of this amount? 4. How does the timing of determining the actual and normal costing rates and the assignment of overhead costs differ under the two methods?

Answer 1

Answer to Q#1 (First question in the list): DCInc. has a manufacturing overhead rate of 75% of direct labor cost. Interpretation Manufacturing overhead refers to those indirect costs such as indirect labor, indirect materials, depreciation on machinery used in the factory, depreciation on plant and building used in the factory, electricity and other utilities used in the factory, In general, at the beginning of a reporting period itself, management will estimate firm's manufacturing overhead for the period and then calculate predetermined overhead rate per suitable base so that during production process, manufacturing overhead will be applied based on actual utilization of base chosen. Meanwhile, actual manufacturing overhead will be recorded separately so that at the end of the reporting period, actual will be compared with applied overhead to calculate under- or over-applied overhead, if any. Such variance will be generally adjusted against cost of goods sold during the respective reporting period itself so that manufacturing overhead account will be nullified at the end of the reporting period In the given statement, DC Inc. applies manufacturing overhead to the work in process using direct labor cost as the suitable base. That is, whatever direct labor cost is recorded, manufacturing overhead cost applied to the production will be equal to 75% of such direct labor cost recorded.