The proper allocation of manufacturing overhead to products produced is required by Generally Accepted Accounting Principles (GAAP) and provides a sound basis for pricing products using a full cost approach. If you know exactly how much it cost to manufacture the item, you can then make an informed decision on setting the Selling Price of the item.

The three elements ofproductcost are Direct Materials, Direct Labor and Manufacturing Overhead. All three are important to the successful allocation of cost to the Inventory accounts Work-In-Process Inventory and Finished Goods Inventory as well as Cost of Goods Sold (an Expense on the Income Statement) once the item is sold.

Let's suppose that you are making automobiles. In July there is a plant shutdown for two weeks. Factory labor, both direct labor (production line workers) and indirect labor (factory supervisor and factoryjanitor), must take mandatory vacation during those two weeks.

Please explain,

1. What are the mechanics of calculating a Predetermined Overhead Rate?
2. Which allocation base should be used to apply overheadcost to the automobiles produced?
3. Should the cost of the factory labor vacations be spread to all automobiles produced during the entire year?Explain your answer whether is be yes or no.
4. Is the Direct employee's vacation treated the same as the Indirect employee's vacation? Explain your answer.
5. How would the Accounting staff's vacation cost be treated? Explain your answer.

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1 Mechanics of Calculating a Predetermined Overhead Rate To calculate a predetermined overhead rate you divide the estimated total manufacturing overh... View the full answer