Prepare journal entries to record the following production activities. 1. Paid overhead costs (other than indirect materials and indirect labor) of $20,000. 2. Applied overhead at 95% of direct labor costs. Direct labor costs were $63,000.
The Correct Answer and Explanation is :
Journal Entries:
- Paid overhead costs (other than indirect materials and indirect labor) of $20,000: Journal Entry:
- Debit: Overhead (Factory Overhead) $20,000
- Credit: Cash $20,000 Explanation:
In this journal entry, we are recording the payment of overhead costs. These costs could include items like utilities, depreciation on factory equipment, or rent for factory space, which are necessary but not directly linked to the production process (like indirect materials or labor). The debit to Factory Overhead reflects the increase in overhead costs, while the credit to Cash represents the outflow of funds to pay for these costs.
- Applied overhead at 95% of direct labor costs. Direct labor costs were $63,000: Journal Entry:
- Debit: Work in Process (WIP) $59,850
- Credit: Factory Overhead $59,850 Explanation:
Overhead is applied based on direct labor costs, and the given rate is 95%. To calculate the applied overhead, we multiply direct labor costs by the overhead rate:
[
Applied\ Overhead = 63,000 \times 0.95 = 59,850
]
The debit to Work in Process reflects the allocation of overhead costs to the products in production, as these costs are incurred in the process of manufacturing. The credit to Factory Overhead reduces the Factory Overhead account, as these overhead costs are now applied to specific jobs or products in the production cycle.
Additional Notes:
In job order costing systems, overhead costs are applied to products or jobs based on a predetermined rate, which can be a percentage of direct labor, direct materials, or machine hours. The actual overhead costs incurred might differ from the applied overhead, leading to either an overapplied or underapplied overhead situation, which would later require adjustment.
- Overapplied Overhead occurs when the applied overhead exceeds the actual overhead costs incurred.
- Underapplied Overhead happens when the applied overhead is less than the actual overhead costs.
These entries align with the accounting principles for recording production activities under a job order costing system.