Question
Aomi, a new Japanese automotive parts manufacturer, will be implementing job-order costing and would like to use a predetermined overhead rate to apply its manufacturing
Aomi, a new Japanese automotive parts manufacturer, will be implementing job-order costing and would like to use a predetermined overhead rate to apply its manufacturing overhead to jobs. However, the company's controller, Hiroshi Itoma, would like your input on his contemplation of which denominator-level driver would be more appropriate for the company to use: machine hours or direct labor hours. The facts he has provided to you are: Within the manufacturing process, the employees work in small groups of three to five employees. Based on trial production runs, the company believes there will be more direct labor hours than machine hours in the manufacturing process. Using your understanding of how to apply manufacturing overhead in a job-order costing environment, what do you think would be the more appropriate basis of overhead application: machine hours or direct labor hours? Why do you believe that is the best answer? Given the choice of driver, are there any implications to consider for underapplied or overapplied overhead?
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