Multiple predetermined overhead rates versus a single predetermined overhead rate - Term Paper Example

Term Paper, Finance and Accounting Multiple predetermined overhead rates versus a single predetermined overhead rate Predetermined overhead rates are rates that are used in the determination and application of manufacturing overheads in the inventory process. They are determined before the beginning of the period thorough firstly the activity base amount that the upcoming period will require in terms of support of the operational activities. Consequently, an estimate of the level of activity’s total manufacturing costs is conducted (Choi 43). This will then enable for the computation of the predetermined overhead rate through the division of the computed estimates of the total overhead manufacturing costs by total estimated activity base. The use of these predetermined overhead rates is preferred due to the fact that it enables for the managers to have an idea of the overall indirect costs of production that they are most likely going to incur without having to wait until the end of the production and reporting exercise. This means that through the calculation of these overhead rates it is possible to project and model better techniques of current and future operations management (Ryan 76). Predetermined overhead rates also give businesses the advantage of simpler reporting and record keeping exercises. A single predetermined overhead rate is one that is used in all the departments in an organization or company. This means that instead of calculating a separate rate for each and every department in the company it is calculated all in one summation. This single predetermined overhead rate is particularly adequate in the chance that the company’s departments are homogeneous in operations hence a way in which overhead costs of production jobs can be allocated. A multiple predetermined overhead rate is a system through which the product cost is estimated. This is where in every single different department in the company a single separate predetermined overhead rate is calculated and then they are summed together. This means that though if they are summed up they produce a single predetermined overhead rate they are present as independent multiple overhead rates of the company’s different departments. This type of estimation of the predetermined overhead rate is important especially in the instance where the products are heterogeneous (Ryan 74). This is because as the products move along the various departments they receive uneven effort and attention therefore calling for the different departmental rates in the achieving of equitable and even product costs estimations. The calculation of the single predetermined overhead rate is more common in most companies’ than the multiple predetermined overhead rates. This is largely attributed to the fact tat the single overhead rate is much simpler to estimate than the multiple overhead rates. This is due to the fact that it involves a single calculation of the overheard rate of the whole company’s departments as one while the multiple overhead rates involve calculation of the rates in the different departments separately (Sherman 43). In this reason also it is thus estimated to be less of a cost in resources and time to use the single overhead rate than the multiple overhead rates. Taking for instance a survey conducted on the popularity of the use of the single overhead rate and the multiple overhead rate established that an approximate 50% of companies use both types. This can be attributed to the fact that the multiple overhead rates are more detailed and informative especially the fact that most companies conduct heterogeneous production. Job order costing Job order costing refers to a costing system in businesses that is applied to the accumulation of costs by the difference jobs it engages in, and it is mostly applied where there are various different products that are being produced per time period. It involves the calculation of the average cost per unit product which is arrived at through the tracing of costs through to the jobs they are related to and divided according to the total number of units that were produced in that job. Job order costing is applied in various industries especially those in which products are sold in batches. However in most general manufacturing industries job order costing may not apply due to the lack of specialization of production hence product selling is not conductible in batches. Job order costing is also used in the service industry and organizations. These are such as law forms, hospitals, and repair shops, movie studios, advertising agencies, and accounting firms among others (Choi 56). These use a variety of job order costing in the purposes of accumulating costs for billing and accounting purposes. The details, concepts and procedures that are dealt with in the service industry are the same as those in the manufacturing firms when it comes to job order costing. In the service industry, keeping the records and assignment problems is more complex in job order costing system where the business offers various different types of services as opposed to when it offers a single service type (Choi 94). This is because since the services being offered are different then the costs for offering these services are different for each service. Therefore, it is required that separate records being maintained for each specific service that is offered. Taking for instance in the service delivery of a lawyer in a large law firm, the firm would keep separate records for each client that is served by the lawyer. These costs would be separate for both advising and defending the clients. The use of this job order costing in the service industry has the advantage of that the management acquires ready access to the costs for each job completed. As such it becomes able to analyze each cost and determine ways through which the costs can be manipulated in future for better overall profitability (Sherman 53). It also enables for the development of ongoing results for each job. This is very useful in monitoring and maintenance of cost accounts as they are added in the transaction process period. However, Job order costing also has a few disadvantages such as that it focuses a lot on primary production disregarding departmental activities leaving the management with inadequate information on the cost process. It also has the challenge of overheads being allocated based on rates that are changed about once a year, fluctuations of overhead costs in the course of the year can cause over or under allocation of overhead costs to jobs categories. This means that the calculation of the total service costs will be untrue leading to untrue judgments and allocation of resources in the services production line of the job. Work cited Choi, Frederick D. S. International Finance and Accounting Handbook. Hoboken: John Wiley & Sons, 2003. Internet resource. Ryan, Bob. Finance and Accounting for Business. London: Thomson Learning, 2004. Print. Sherman, Eliot H. Finance and Accounting for Nonfinancial Managers. New York: American Management Association, 2011. Internet resource. Read More