Why do companies develop estimates for overhead costs? How are estimates developed?
Companies frequently use overhead cost estimates for a number of reasons. Many actual overhead cost amounts are not known in advance, and they sometimes are not completely available until well after a product has been produced and sold. Product costs must be estimated so that appropriate sales prices can be determined. Also, some costs are not uniformly incurred during the year. For example, a property tax bill for the entire year is invoiced only once a year. Thus, an overall estimate helps to smooth or normalize costs.
Overhead estimates are based upon prior year actual overhead costs with any reasonable adjustments being made to the historical numbers (i.e. adjustments for rising or falling costs, additional depreciation on a new machine, etc.). In addition, an identification of a "cost driver" is necessary in order to determine how overhead will be applied to specific products.
You might also like to view...
An external event involves interaction between an entity and its environment
a. True b. False Indicate whether the statement is true or false
Dan has a Web conference, so he ________ be late
a. could b. might
A budget that is based on the actual activity of a period is known as a:
A. master budget. B. flexible budget. C. static budget. D. continuous budget.
A portfolio of ten companies is formed. In a third-to-default swap (Circle one)
A. There is a payoff when the third default on the portfolio happens B. There is a payoff when the first, second and third companies defaults happen C. There is a payoff when the third, fourth, fifth…tenth companies defaults happen D. None of the above