Question

In a job-order cost system, the application of factory overhead is usually reflected in the general ledger as an increase in

Option 1:
a. Work-in-process inventory.

Option 2:
b. Finished goods inventory.

Option 3:
c. Cost of goods sold.

Option 4:
d. Raw materials inventory.

Answer 1

In a job-order cost system, the application of factory overhead is typically reflected as an increase in Work-in-process (WIP) inventory.

Step-by-step explanation:

In a job-order cost system, the application of factory overhead costs, which include both fixed and variable components, is typically recorded as an increase in Work-in-process (WIP) inventory. Variable costs, such as labor and raw materials, vary directly with the level of output and are charged to specific jobs as they are incurred. Fixed costs, often referred to as overhead, are spread across the jobs, not directly tied to the number of units produced or hours worked. When overhead is allocated to specific jobs, the WIP inventory is increased to reflect the costs assigned to the products that are currently in production but not yet completed.

'Spreading the overhead' means allocating the fixed costs over the units produced, thereby decreasing the average fixed cost per unit as production volume increases. This leads to a downward-sloping average fixed cost curve. However, when the firm grows beyond a certain point, diseconomies of scale can set in, which results in increased average costs due to inefficient management and communication issues.