Question

You are the management accountant for a custom cabinetry business that uses a job order cost system. The business sends customers detailed job cost sheets along with the invoice. The job cost sheets include the date materials were used, the dollar cost of the materials, as well as direct labor hours and costs. Total overhead applied is included. A customer received this information and left a voice mail requesting an explanation for the estimation of MOH charges when all other items were actual charges.
Your task is to record a message to the customer, Sarah Lopez, explaining why exact costs of overhead could not be included.
Your response should include (1) a general description of what MOH is, (2) the process of applying it, (3) why exact costs are not applied to specific jobs.

Just need help with what I should say in my recording.

Answer 1

Explanation of Manufacturing Overhead Costs (MOH):

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You can use following script for recorded message:

"Hi, Ms. Lopez!

Hope you are doing great. I got your message inquiring about MOH charges charged on the cost sheet. I will be more than happy to explain everything with respect to this charge.

MOH stands for Manufacturing Overhead and refers to overhead costs incurred by a business to run it's operations. For example, when we are working on a custom cabinet job, there are some not directly traceable costs are also getting incurred along with direct material, labor, and other direct traceable costs such as electricity used for production, depreciation on machinery, payroll for support staff etc. These costs are also popularly known as Factory overhead. These are costs which are being incurred by business but can not be directly traced with final product or services.

As costs are important parameter of pricing decisions for any entity, It is also important to trace MOH costs too. As it is not feasible and economical to keep track of each and every factory cost separately, such MOH costs are clubbed together and allocated or in simple terms "spreaded" over some estimated base such as estimated units of productions, Job orders etc. For example if a we are incurring say $50,000 during a period as MOH costs and producing 500 cabinets, then each cabinet will be assigned with MOH cost of $100 for it's share in total MOH cost pool.

As mentioned earlier, MOH costs are getting incurred constantly and it is not feasible or economically advisable to keep track and record of such cost for each and every product or job cost as it will violate most basic principle of cost-benefit analysis where cost borne to record MOH cost for each product and job will exceed benefits arising from such system.

I hope you are clear about the whole MOH costs concept and why such charges are added to your job sheet as an estimated number and not as an actual number.

Still if you have any doubt or query, Please feel free to contact me! Thanks and have a nice day!"

Note: Para 2 ,3 and 4 include answers to Part (1), (2) and (3)