A normal cost system applies overhead to jobs ________. – A normal cost system applies overhead to jobs to estimate the total cost of production. This differs from actual costing, which assigns actual overhead costs to jobs. Normal costing uses predetermined overhead rates based on estimated costs and activity levels, providing more timely and consistent job cost information.
Understanding the types of normal cost systems, overhead allocation methods, and overhead rate calculation is crucial for accurate job costing. This article delves into these concepts, exploring their advantages, disadvantages, and impact on job costing accuracy.
Normal Cost System
A normal cost system applies overhead to jobs based on a predetermined rate that is established prior to the production period. This rate is based on the estimated overhead costs for the period and the expected level of activity. The use of a predetermined rate allows for the allocation of overhead costs to jobs in a consistent and predictable manner, regardless of the actual level of overhead costs incurred during the period.
Types of Normal Cost Systems
There are several different types of normal cost systems, including:
- Standard costing: Uses standard overhead rates that are based on historical data or industry benchmarks. Standard overhead rates are established for each type of overhead cost and are used to allocate overhead costs to jobs based on the actual level of activity.
- Activity-based costing (ABC): Allocates overhead costs to jobs based on the actual consumption of resources. ABC systems use a variety of cost drivers to allocate overhead costs to jobs, such as direct labor hours, machine hours, and activity-based units.
Overhead Allocation Methods
There are a variety of methods that can be used to allocate overhead costs to jobs. The most common methods include:
- Direct labor hours: Allocates overhead costs to jobs based on the number of direct labor hours worked on the job.
- Machine hours: Allocates overhead costs to jobs based on the number of machine hours used on the job.
- Activity-based costing (ABC): Allocates overhead costs to jobs based on the actual consumption of resources.
Each of these methods has its own advantages and disadvantages. The best method for a particular company will depend on the nature of its business and the availability of data.
Calculation of Overhead Rates
The overhead rate is calculated by dividing the total estimated overhead costs for the period by the expected level of activity. The expected level of activity is typically expressed in terms of direct labor hours, machine hours, or activity-based units.
The formula for calculating the overhead rate is:
“`Overhead rate = Total estimated overhead costs / Expected level of activity“`
Impact on Job Costing
The application of overhead costs to jobs affects the accuracy and reliability of job costing information. The use of a predetermined overhead rate can lead to over- or under-allocation of overhead costs to jobs, which can distort the profitability of jobs.
It is important to use appropriate overhead rates to ensure accurate cost estimates. The overhead rate should be based on the most recent data available and should be updated regularly to reflect changes in the business environment.
Case Study, A normal cost system applies overhead to jobs ________.
A manufacturing company uses a normal cost system to allocate overhead costs to jobs. The company uses a standard costing system and allocates overhead costs to jobs based on the number of direct labor hours worked on the job. The company’s overhead rate is $20 per direct labor hour.
The company is currently working on a job that requires 100 direct labor hours. The total overhead cost that will be allocated to the job is $2,000 (100 direct labor hours x $20 per direct labor hour).
The use of a normal cost system allows the company to allocate overhead costs to jobs in a consistent and predictable manner. This information is used to determine the profitability of jobs and to make decisions about pricing and production.
User Queries: A Normal Cost System Applies Overhead To Jobs ________.
What are the advantages of using a normal cost system?
Normal costing provides timely and consistent job cost information, simplifies cost accounting procedures, and facilitates budgeting and planning.
What are the disadvantages of using a normal cost system?
Normal costing may result in over or under-allocation of overhead costs, especially when actual activity levels differ significantly from estimated levels.
How do you calculate an overhead rate?
Overhead rate is calculated by dividing the estimated total overhead cost by the estimated activity level (e.g., direct labor hours, machine hours, or activity units).
