ECONOMICS

Detailed explanation-1: -Actual overhead costs are not traced to jobs because the very nature of the overhead is indirect, i.e manufacturing overhead comprises of costs that cannot be directly traceable to finished goods or specific jobs. In order to assign them to jobs, they have to be allocated rather than being traced.

Detailed explanation-2: -The activity used to allocate manufacturing overhead costs to jobs is called an allocation base. The goal is to allocate manufacturing overhead costs to jobs based on some common activity, such as direct labor hours, machine hours, or direct labor costs. Organizations use various other types of allocation bases.

Detailed explanation-3: -Actual manufacturing overhead costs are the indirect manufacturing costs incurred periodically throughout the year in the production process. Manufacturing overhead applied are the overhead costs added or applied to each job during the production process.

Detailed explanation-4: -Manufacturing overhead costs are called indirect costs because it’s hard to trace them to each product. These costs are applied to the final product based on a pre-determined overhead absorption rate.