Question

A manufacturing company applies factory overhead based on direct labor hours. At the beginning of the year, it estimated that factory overhead costs would be $354,100 and direct labor hours would be 40,400. Actual manufacturing overhead costs incurred were $309,700, and actual direct labor hours were 55,000. The journal entry to apply the factory overhead costs for the year would include a:

a. credit to Factory Overhead for $354,100
b. debit to Factory Overhead for $481,800
c. debit to Factory Overhead for $309,700
d. credit to Factory Overhead for $481,800

Answer 1

Option C is correct

debit to Factory Overhead for $309,700

Step-by-step explanation:

Overheads are charged to cost units using a pre-determined overhead absorption rate. Absorbed overhead is determined by multiplying the overheard absorption rate by the actual activity level.

If the absorbed overhead exceeds the actual overhead cost, the difference is over absorbed overhead , and it is under-absorbed overhead if reverse is the case.

In any way, only the actual overhead incurred would be charged as production cost.

In the question, the actual overhead cost is $309,700, hence it will be debited to the Factory overhead account representing an increase in production cost

The right accounting entry is

debit to Factory Overhead for $309,700