University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

442

Pages:

1
Author:

stud_ice13

Key Points: 1. Factory Overhead Account Basics: o Companies use a predetermined overhead rate to apply factory overhead costs to jobs throughout the period. o Actual overhead costs are recorded as debits in the Factory Overhead account, while applied overhead costs (based on the rate) are recorded as credits. 2. Difference Between Actual and Applied Overhead: o Due to the difficulty of estimating exact costs, actual overhead rarely matches applied overhead. o At period-end, the Factory Overhead account balance will show either:  A debit balance (underapplied overhead): actual overhead > applied overhead.  A credit balance (overapplied overhead): actual overhead < applied overhead. 3. Closing Process: o The remaining balance (under- or overapplied overhead) in the Factory Overhead account is typically closed to the Cost of Goods Sold (COGS) account, making COGS reflect the actual costs. o If underapplied, a debit to COGS is recorded, increasing COGS and reducing net income. If overapplied, a credit to COGS is recorded, decreasing COGS and increasing net income. 4. Example (based on March data): o Actual overhead incurred was $6,920; however, applied overhead was only $6,720, resulting in a $200 underapplied balance. o To close this underapplied amount, a debit of $200 is added to COGS, and the Factory Overhead account is credited by $200, leaving it with a zero balance. 5. Materiality Consideration: o For immaterial amounts, the entire balance is adjusted in the COGS account. o For material amounts, the under/overapplied amount may be allocated across COGS, Work in Process Inventory, and Finished Goods Inventory, an approach explored in more advanced accounting courses. 6. Journal Entry for Closing Example: o Case 1 (Actual Overhead: $305,000; Applied Overhead: $300,000): Debit COGS $5,000 (underapplied), Credit Factory Overhead $5,000. o Case 2 (Actual Overhead: $298,500; Applied Overhead: $300,000): Debit Factory Overhead $1,500 (overapplied), Credit COGS $1,500.