Question

Zoey owns a bakery and uses normal costing and found that their material overhead was underapplied. Using the prorated method, what would their adjusting journal entry be?

Answer 1

Zoey must create an adjusting journal entry using the prorated method to distribute the underapplied overhead. The example provided shows the method of calculating accounting profit by deducting explicit costs from sales revenue, resulting in $50,000 for a firm with specific revenue and costs.

Step-by-step explanation:

The student's question concerns Zoey's bakery, which uses normal costing and experienced underapplied material overhead. To correct this, Zoey would need to make an adjusting journal entry using the prorated method. This involves distributing the underapplied overhead across the work-in-process, finished goods, and cost of goods sold based on their respective overhead allocation.

The journal entry typically includes debiting the cost of goods sold, work-in-process inventory, finished goods inventory, and crediting the manufacturing overhead account.

While the exact adjusting journal entry would require specific numbers from Zoey's accounting records, in a broader sense, if a firm has sales revenue of $1 million, expenses of $600,000 on labor, $150,000 on capital, and $200,000 on materials, its accounting profit would be calculated as the total revenues minus the explicit costs which in this case would be $50,000.