Question

Zoey uses normal costing with applied Material Overhead for their landscaping business. They did well at budgeting and estimating their costs throughout the year, however, they over applied their Material Overhead by a small margin. At year end how would Zoey make the adjustments to clear out the Material Overhead account?

Answer 1

Zoey would adjust for over applied Material Overhead by making an adjusting entry that debits the overhead account and credits the cost of goods sold. 'Spreading the overhead' means distributing fixed costs over the quantity of output, resulting in a downward-sloping average fixed cost curve as production increases.

Step-by-step explanation:

When Zoey finds that the Material Overhead has been over applied, it means that the overhead cost allocated to projects is more than the actual overhead incurred. At the end of the year, Zoey needs to adjust the accounts to reflect the actual costs.

This adjustment is typically done through an adjusting entry in the general ledger. If overhead was over applied, the overhead account will have a credit balance. To clear this, Zoey would debit the overhead account and credit the cost of goods sold or other appropriate accounts. This action effectively reduces expenses, which increases net income, correcting the over application.

Spreading the overhead refers to allocating the fixed costs, like rent or salaries, over the units produced. If the fixed cost is $1,000, as the quantity of output increases, the average fixed cost per unit decreases. This is because the same amount of overhead is spread over more units, lowering the cost per unit.

The average fixed cost curve generally has a downward slope, reflecting that as production increases, the fixed cost per unit falls.