The accounting for the allocation of overhead costs is a three-step process and occurs at three different points in the accounting cycle.

Question

List each of the three steps. For each step indicate when the step occurs and why the step is needed.

Answer 1

Step 1: The predetermined overhead allocation rate is calculated before the period begins. Managers cannot wait until the end of the period to know the actual total overhead costs. Companies use this predetermined rate to allocate estimated overhead cost to individual jobs.
Step 2: Overhead is allocated during the period. During the period, managers need to allocate overhead to all jobs completed during the period and to jobs still in process at the end of the period. Allocated overhead is added to assigned direct material and direct labor costs. This allows managers to know the total cost of jobs completed and of jobs still in process at the end of the period.
Step 3: Overhead is adjusted at the end of the period. Because the overhead costs have been allocated based on the predetermined overhead allocation rate, the actual overhead costs may not equal the amount of overhead allocated during the period. An adjustment is required to zero out the Manufacturing Overhead account.