Question

Which one of the following journal entries in a standard cost system would be used to apply standard factory overhead costs to production?

A) A credit to the factory overhead account, at standard cost.
B) A credit to Finished Goods Inventory, at standard cost.
C) A debit to WIP inventory, at actual cost.
D) A credit to WIP inventory, at standard cost.
E) A debit to the factory overhead account, at standard cost.

Answer 1

The correct journal entry to apply standard factory overhead costs in a standard cost system is a debit to the WIP Inventory account and a credit to the Factory Overhead account, both at standard cost (Option E).

Step-by-step explanation:

The journal entry in a standard cost system to apply standard factory overhead costs to production is a debit to Work in Process (WIP) Inventory and a credit to the Factory Overhead account, both at standard cost.


The correct choice is therefore:

E) A debit to the factory overhead account, at standard cost.

Here's a step-by-step explanation of the process:

1. Determine the standard factory overhead rate, which is typically based on estimated costs and activity levels.
   
   
2. Apply the standard overhead rate to the actual activity level (like machine hours or labor hours) to calculate the standard overhead allocated to production.
   
   
3. Make a journal entry that debits WIP Inventory for the amount of the allocated standard overhead, which represents the increase in production costs due to factory overhead. Simultaneously, credit the Factory Overhead account to record the amount of overhead applied to WIP Inventory.