Final answer:
Over or under allocating MOH affects job costs, leading to inaccuracies in pricing and financial reporting. Over allocation results in jobs being priced too high and under allocation in jobs being priced too low, with subsequent impacts on profitability and decision-making.
Step-by-step explanation:
Over allocating or under allocating Manufacturing Overhead (MOH) significantly impacts the cost of jobs manufactured during a period. When there is over allocation of MOH, the jobs' costs are overstated. This leads to the jobs being priced higher than they should be, which can reduce competitiveness and result in overestimation of ending inventory. Conversely, under allocation of MOH results in the jobs' costs being understated, potentially leading to the pricing of jobs lower than they should be, which can affect profitability negatively and result in an underestimation of ending inventory.
For example, if MOH is over allocated, a company might charge $120 for a job that should cost $100. If MOH is under allocated, the company could charge $80 for a job that cost $100 to make. Both scenarios impact the financial statements and management decision-making negatively. Ultimately, appropriate allocation ensures that costs mirror the actual use of resources, aiding in making informed pricing, planning, and evaluating decisions.