Dillon Products manufactures various machined parts to customer specifications. The company uses a joborder costing system and applies overhead cost to jobs on the basis of machine-hours. At the beginning of the year, it was estimated that the company would work 240,000 machine-hours and incur 4,800,000 in manufacturing overhead costs.
The company spent the entire month of January working on a large order for 16,000 custom made machined parts. The company had no work in process at the beginning of January. Cost data relating to January follow: a. Raw materials purchased on account, 325,000 . b. Raw materials requisitioned for production, 290,000(80 % direct materials and 20% indirect materials). c. Labor cost incurred in the factory, 180,000 (one-third direct labor and two-thirds indirect labor). d. Depreciation recorded on factory equipment, 75,000 . e. Other manufacturing overhead costs incurred, 62,000 (credit Accounts Payable). f. Manufacturing overhead cost was applied to production on the basis of 15,000 machine-hours actually worked during the month. g. The completed job was moved into the finished goods warehouse on January 31 to await delivery to the customer. (In computing the dollar amount for this entry, remember that the cost of a completed job consists of direct materials, direct labor, and applied overhead.)
(d) Compute the unit product cost that will appear on the job cost sheet.

Manufacturing overhead costs represent all such costs which are incurred in production of goods excluding direct materials and direct labor. Manufacturing overhead costs are further classified into fixed manufacturing overhead costs and variable manufacturing overhead costs.
Manufacturing overhead are also called factory overheads or indirect manufacturing costs.
These costs are indirect in that it is impractical to directly trace them to each product.
This is why manufacturing overhead costs are applied to cost of a product based on a pre-determined overhead absorption rate.
An overhead absorption rate represents manufacturing overhead costs per unit of activity base (also called cost driver).
Typical cost drivers are labor cost, labor hours and machine hours.
Manufacturing overhead costs are product costs (inventoriable costs) because they are not expensed out in the period in which they are incurred but are capitalized as part of the cost of inventories.

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