Question

Why aren’t actual manufacturing overhead costs traced to jobs just as direct materials and direct labor costs are? Accountants are generally rather exact but there is a lot of estimating involved in overhead application. Should this overhead application process be reconsidered. Should be around 250 words and please use an example and cite if you found anything from a website.

Answer 1

Manufacturing overhead costs are those costs that are neither direct materials costs nor indirect materials costs. These costs are incurred for manufacturing a product and hence are indirect factory related costs.

The primary reason why actual manufacturing overhead costs are not traced to jobs just as direct materials and direct labor costs are is due to the fact that manufacturing overhead costs are not directly traceable to the products being manufactured in an organization. Manufacturing overheads are indirect factory related costs and unlike direct material and direct labor these costs cannot be traced to jobs and hence overheads are allocated by accountants through an estimation process.

Let me explain the above with the help of an example. Suppose that there is a factory that makes wooden chairs as well as plastic chairs. The process involved in manufacturing of both these chairs is different and so different set of workers are allotted for manufacturing each type of chair. Suppose that 10 workers make only plastic chairs while 15 workers make only wooden chairs. The wages of the workers can easily be allocated to the jobs as we know which wages were paid for manufacturing of wooden chairs and which wages were paid for manufacturing of plastic chairs.

Now take the example of a manufacturing overhead like property tax on the factory. Property tax is an indirect factory related cost and the cost cannot be traced to different jobs of the company i.e. we cannot say for sure which part of property tax was incurred for making plastic chairs and which part was incurred for making wooden chairs. Hence an estimate appropriation will have to be done with regards the expense towards property tax and other manufacturing overheads like wages of material handlers, forklift operators, wages of maintenance people etc.