Question

Clemens company applies overhead based on direct labor cost. estimated overhead and direct labor costs for the year were $116,500 and $125,400, respectively. during the year, actual overhead was $107,800 and actual direct labor cost was $116,700. the entry to close the over- or underapplied overhead at year-end, assuming an immaterial amount, would include (round predetermined overhead rate to nearest whole percentage.)

multiple choice
A. a debit to work in process inventory for $731.
B. a credit to cost of goods sold for $731.
C. a credit to finished goods inventory for $731.
D. a debit to cost of goods sold for $731.
E. a credit to factory overhead for $731.

Answer 1

The entry to close the over- or underapplied overhead at year-end, assuming an immaterial amount, would include a debit to Cost of Goods Sold for $731. The correct answer is D.

Step-by-step explanation:

The entry to close the over- or underapplied overhead at year-end, assuming an immaterial amount, would include a debit to Cost of Goods Sold for $731. This is because underapplied overhead means that the actual overhead incurred is greater than the applied overhead. Therefore, it needs to be added to the cost of goods sold to account for the additional costs.

The correct journal entry for closing the overapplied overhead of $731 is a debit to Factory Overhead and a credit to Cost of Goods Sold (COGS) for $731.

The question is regarding the calculation of overhead application in a manufacturing company, specifically the adjustment entry for the over- or underapplied overhead at year-end when the amounts are considered immaterial. To determine the over- or underapplied overhead, we compare the actual overhead costs incurred during the year to the overhead that was applied to products based on the predetermined overhead rate.

First, we calculate the predetermined overhead rate by dividing the estimated overhead by the estimated direct labor cost, which would be $116,500 / $125,400, approximately 93%. Applying this rate to the actual direct labor cost ($116,700), we would have expected to apply $108,531 ($116,700 * 93%) of overhead. Comparing this with the actual overhead of $107,800, we find that overhead was overapplied by $731.

When overhead is overapplied and the amount is immaterial, the typical adjustment is a debit to Factory Overhead and a credit to Cost of Goods Sold (COGS) for the overapplied amount. Therefore, the correct journal entry for the adjustment would include a debit to Factory Overhead for $731, and a credit to COGS for the same amount.