MANAGERIAL ACCOUNTING
Master of Business Administration
Kuala Lumpur Malaysia

1. Define and explain the meaning of a manufacturing overhead rate that is applied in a job order costing system.
A predetermined overhead rate is based on the relationship between estimated annual overhead costs and annual operating activity. It also used to apply the provisions of the estimated cost of manufacturing overhead cost object for a particular reporting period. This rate is often used to help close the books faster, because it avoids the preparation of the actual manufacturing overhead costs as part of period end closing process. However, the difference between the actual and the estimated overhead should be reconciled at least at the end of each fiscal year.
The predetermined rate is from the following calculation: = Estimated Annual Overhead Costs ÷ Expected Cost of Prints |

There are some concerns with using a predetermined overhead rate, which includes: * Not realistic. Because both the numerator and denominator of the calculation of the budget, it is likely that the results will not bear much resemblance to the actual overhead rate. * Decision Basis. If sales and production decisions are made based in part on predetermined overhead rates, and the rate was not right, then so too will be the result. * Variation of recognitions. The difference between the actual and the set up can be charged to expense in the current period, which could make a material change in the number of reported profits and asset inventory. * Weak link to historical costs. Use historical information to derive the amount of manufacturing overhead may not apply if there is a spike abruptly or decrease in these costs. * Larger organizations may employ a predetermined overhead rate in each production department which tends to improve the accuracy of overhead application