Question

Which of the following most correctly states about the rationale for using estimated (allocated) manufacturing overhead costs instead of actual ones in calculating the cost of goods manufactured (COGM) incurred during a given time period?

1 Because actual overhead costs incurred may not be available when COGM is measured.

2 Because manufacturing overhead costs are easy to track.

3 Because manufacturing overhead costs tend to be immaterial these days

4 Because using estimated manufacturing overhead costs is required by GAAP.

Answer 1

Based on the information available in the question, we can answer as follows:-

The correct answer is Option 1 - Because actual overhead costs incurred may not be available when COGM is measured. This statement is true because the actual overhead costs incurred is generally not available when COGM is measured . Predetermined or estimated manufacturing overhead costs enables a company to estimate the job costs sooner. With the help of predetermined/estimated manufacturing overhead costs, the companies can assign overhead costs to production sooner. Hence, this is the correct answer.

Option 2 is incorrect. Being easy track is an advantage but is not the actual reason for using the estimated overhead costs and hence, this option is incorrect.

Option 3 is incorrect. This statement is not true. Overhead costs tend to be material in any type of organization.

Option 4 is incorrect. This statement is not true as using estimated overhead costs is not required by GAAP as such.

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