Participation Exercise #4 Assignment Example | Topics and Well Written Essays - 250 words

Participation Exercise #4 - Assignment Example Manufacturer’s expenses that occur apart from the actual manufacturing is the second component of overhead (nonmanufacturing costs). Predetermined overhead rate is useful in ‘applying’ overhead cost in a manufacturing setup. It is calculated at the beginning of the company’s accounting cycle. The formula for calculating the pre-determined overhead rate is as follows: According to generally accepted accounting principles (GAAP) manufacturing overhead must be included in the cost of Work in Process Inventory and Finished Goods Inventory on a manufacturer’s balance sheet. Pre-determined rate therefore is used to divide and allocate manufacturing overhead costs to each unit produced. It is defined as the rate used to apply manufacturing overhead to work- in- process inventory (Kimmel, Weygandt and Kieso). From the formula for calculating predetermined overhead rate, overhead is obtained by multiplying predetermined overhead rate by actual driver units. The difference between applied overhead and the amount of overhead actually incurred is referred to as over-or-under-applied overhead. Over-applied overhead increases the cost of production hence lower the company’s level profits. Under-applied overhead gives high rates of profits which may not be the correct position of the organization (Kimmel, Weygandt and