Accounting question? (9) multiple choice check?

Question

Estimated overhead and direct labor costs for the year were $112,500 and $125,000. During the year, actual overhead was $107,400 and actual direct labor cost was $120,000. The entry to close the over-or underapplied overhead at year-end would include:

a) a debit to COGS for $600
b) a credit to Factory Overhead for $600
c) a credit to Finished Goods inventory $600
d) a debit to Goods in Process inventory for $600
e) a credit to COGS for $600

show work please...


my answer: well i know the entry is "e" but i dont know how they got the $600??

Answer 1

If based on direct labour costs of $125,000, they estimated overhead at $112,500, they're using 90% of direct labour costs to estimate overhead. So if direct labour costs turned out to be $120,000, the overhead should have been 90% or $108,000, but it turned out to be even less, at $107,400, which means there is a favourable variance of $108,000 - $107,400 = $600. Since it's a favourable variance, it's a credit to COGS, to bring down the cost.

Answer 2

Absorption is based on actual activity.

Thus overhead absorbed
= Actual Direct Labor Cost * Rate of Absorption of Overhead.
= $120,000 * 90*
= $108,000

Since Overhead Cost incurred < Overhead Cost absorbed,
there is over absorption.

Overabsorbed overhead
= Overhead absorbed - Overhead incurred
= $108,000 - $107,400
= $600

Recording Overhead incurred
Dr. Factory Overhead Control a/c___ $107,400
Cr. General Ledger adjustment a/c__ $107,400

Absorbing Factory Overhead
Dr. Work-in-Progress Control a/c__ $108,000
Cr. Factory Overhead Control a/c__ $108,000

This leaves a credit balance of $600 in the FOHC a/c
which is closed by transfer to Costing Profit and Loss a/c if the overabsorption is on account of abnormal reasons.

Dr. Factory Overhead Control a/c__ $600
Cr. Costing Profit and Loss a/c ____$600


If the overabsorption is normal, then it would be adjusted to Cost of Goods Sold a/c (treating it as periodic cost)

Dr. Cost of Goods Sold a/c__ $600
Cr. Costing Profit and Loss a/c ____$600

Answer 3

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