Dillon Products manufactures various machined parts to customer specifications, and they utilize a job order costing system to allocate costs effectively. In this system, overhead costs are applied to jobs based on the number of machine hours used during production.
The overhead application rate is determined at the beginning of the accounting period by estimating the total overhead costs and dividing that by the estimated total machine hours for the period. This rate is then multiplied by the actual machine hours worked on each job to determine the overhead cost allocated to that specific job. This method ensures that overhead is accurately matched to the production process, providing a clearer picture of the actual costs involved in manufacturing each custom part.
By using machine hours as the basis for applying overhead, Dillon Products can effectively manage production costs and pricing strategies, ensuring that they remain competitive while also meeting the specific needs of their customers.