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Overhead costs can be substantial in manufacturing and service organizations. As indicated in the following News Note, the ability to estimate and correctly apply overhead is a major factor in the relative success of custom producers.
Actual overhead incurred during production is included in the Manufacturing Overhead control account. If actual overhead is applied to jobs, the cost accountant will wait until the end of the period and divide the actual overhead incurred in each designated cost pool by a related measure of activity or cost driver. Actual overhead would be applied to jobs by multiplying the actual overhead rate by the actual measure of activity associated with each job.
More commonly, overhead is applied to jobs using one or more annualized predetermined overhead application rates. Overhead is assigned to jobs by multiplying the predetermined rate by the actual measure of the activity base that was incurred during the period for each job. This method is normal costing.
