Home Assignment - 2

Tanya Goyal

Part-1: Exercises

EXERCISE 1-16. Incremental Analysis [LO5.61] Wilmington Chemicals produces a chemical.

PX44, which is used to retard fading in exterior house paint. In the past year, the company
produced 200,000 gallons at a total cost of $1,000,000 ($5 per gallon). The company is
currently considering an order for 10,000 gallons from a paint company in Canada (to date,
Wilmington has not sold the product in markets outside the United States). Explain why the
incremental cost associated with this order is likely to be less than $50,000.

1. EconomiesofScale: When a company increases its production volume, it can often achieve
lower costs per unit due to economies of scale. This means that as Wilmington Chemicals
produces more gallons of PX44, the average cost per gallon decreases. Since the order from
the Canadian paint company is relatively small compared to Wilmington's total production
capacity (10,000 gallons compared to 200,000 gallons produced last year), the incremental
cost associated with this order is likely to be less than $50,000. This is because the additional
cost of producing these extra 10,000 gallons is spread out over the larger total production
volume, resulting in a lower per-unit cost.

2. Existing Infrastructure and Resources: Wilmington Chemicals already has the

infrastructure, equipment, and resources in place to produce PX44. They have already
incurred the fixed costs associated with setting up and maintaining their production facilities.
Therefore, producing an additional 10,000 gallons may not require significant additional
investments in infrastructure or resources, leading to a lower incremental cost.

Bulk Ordering and Supplier Relationships: Suppliers often offer discounts or better pricing
3.
for bulk orders. Since Wilmington Chemicals is already producing PX44 in large quantities,
they may have negotiated favourable pricing with their suppliers for raw materials and other
inputs. This can further contribute to lower incremental costs for producing the additional
10,000 gallons.

Distribution and Marketing Efficiencies: Since Wilmington Chemicals has experience

4. selling PX44 in the US market, they may already have established distribution channels,
marketing strategies, and customer relationships. Expanding sales to Canada may not require
substantial additional expenditures in marketing or distribution efforts, leading to cost savings.

ÉXERCISE 1-17. Incremental Analysis (LO 6] In the past year, Williams Mold & Machine had
sales of $8,000,000 and total production costs of $6,000,000. In the coming year, the company
believes that sales and production can be increased by 30 percent, but this will require adding
a second production shift to work from 4:00 P.M. to 1:00 A.M.

Required
a. Indicate three production costs that are likely to increase because of adding a
second production shift.

1. LabourCosts: Hiring additional workers for the second shift will increase labour costs. This
includes wages, benefits, and potentially overtime pay if the demand requires extended
hours.
2 Utilities Costs: Running production equipment, lighting, heating or cooling systems, and
other utilities for an extended period due to the second shift will increase utility costs.
. Maintenance Costs: With equipment being used for longer hours, maintenance costs are
likely to increase. This includes regular maintenance to ensure optimal performance and
3 repairs if any breakdowns occur during the extended hours of operation.

.
b. What production cost most likely will not increase when.the second shift is added?

The production cost that most likely will not increase when adding the second shift is Raw
Material Costs. Raw materials are typically purchased in bulk or based on production volume rather
than operational hours. Therefore, adding a second shift may not directly impact the cost of raw
materials unless the increased production leads to higher material consumption or different sourcing
strategies.

PROBLEM 1-1. Budgets in Managerial Accounting [LO 2,5] Santiago's Salsa is in the process
of preparing a production cost budget for May. Actual costs in April were:

Santiago’s Class Production Cost

April 2011

Production 25000JarsofSalsa

Ingredientcost(variable) $20,000

Labourcost(variable) 12,000

Rent(fixed) 5.000

Depreciation(fixed) 6,000

Others(fixed) 1,000

Total $44,000

Required

a. Usingthisinformation,prepareabudgetforMay.Assumethatproductionwillincrease
to 30,000 jars of salsa, reflecting an anticipated sales increase related to a new
marketing campaign.

Santiago’s Class Production Cost

May 2011
 Production 30000 Jars of Salsa

Ingredient cost (variable) $24,000

Labour cost (variable) 14,400

Rent (fixed) 5.000

Depreciation (fixed) 6,000

Others (fixed) 1,000

Total $50,400

b. Does the budget suggest that additional workers are needed? Suppose the wage rate
is $20 per hour. How many additional labour hours are needed in May? What would
happen if management did not anticipate the need for additional labour in May?

● LabourcostperjarinApril=$12000/25000jar=$0.48perjar
● LabourcostperjarinMay=$0.48perjar(assumingthesamerate)
● AdditionalJarsProduced=30000-25000=5000jars
● AdditionalLabourcostperinMay=5000*0.48=$2,400
● AdditionalLabourhoursneeded:$2,400/$20=120Hours
Yes, we required additional additional workers

Impact of Not Anticipating Additional Labour Needs:

If management did not anticipate the need for additional labour in May, they might face several
challenges:

● Existingworkersmightbeoverworked,leadingtofatigue,reducedproductivity,andpotential
errors in production.
● Delaysinproductioncouldoccur,affectingdeliveryschedulesandcustomersatisfaction.
● Overtimecostsmightincreasesignificantlyifexistingworkersarerequiredtoworkextra
hours to meet the production demand.

c. Calculate the actual cost per unit in April and the budgeted cost per unit in
May. Explain why the cost per unit is expected to decrease.

● $1.76
Actual per
costjar
per unit in April = $44,000/25000 jar =
● $1.68 percost
Budgeted jar per unit in May = $50,400/30000 jar =

1 Economies of Scale: The production increase from 25,000 jars in April to 30,000 jars in May
. represents economies of scale. As production volume increases, fixed costs such as rent,
depreciation, and others are spread over a larger number of units. This results in a lower cost
per unit.
 2. Efficiency Improvements: With experience gained from production in April and better
planning for May's production, there may be efficiency improvements in processes, reducing
labour and material costs per unit.
3. Bulk Purchasing Discounts: As production volume increases, Santiago's Salsa may
negotiate better deals with suppliers for raw materials, leading to lower ingredient costs per
unit.
4. Optimised Resource Utilisation: Adding a second production shift can optimise resource
utilisation without significantly increasing fixed costs. This can contribute to lower production
costs per unit in May compared to April.
5.

PROBLEM 1-2. Incremental Analysis [LO 5, 6] Consider the production cost information for
Santiago's Salsa in Problem 1-1. The company is currently producing and selling 325,000 jars
of salsa annually. The jars sell for $5.00 each.The company is considering lowering the price to
$4.60. Suppose this action will increase sales to 375,000 jars.
Required
a. What is the incremental cost associated with producing an extra 50,000 jars of salsa?

Incremental cost = $1.76 * 50,000 jars = $88,000

b. What is the incremental revenue associated with the price reduction of $0.40 per jar?

3,25,000 jar * $5 = $16,25,000

3,75,000 jar * $4.60 = $17,25,000
Incremental revenue = $1,00,000
Or
Incremental revenue = $0.40 * 50,000 jar = $20,000

C. Should Santiago's lower the price of its salsa?

To determine whether Santiago's should lower the price of its salsa, we need to compare the
incremental cost and the incremental revenue.

Incremental Cost = $88,000

Incremental Revenue = $20,000

Since the incremental cost of producing an extra 50,000 jars is significantly higher than the
incremental revenue from the price reduction, it may not be advisable for Santiago's to lower the price
of its salsa. The increase in sales volume may not offset the higher production costs, resulting in
potentially lower overall profitability. Additional analysis, such as considering the impact on market
share, competition, and long-term customer loyalty, would be necessary to make a fully informed
decision.

Review Problem 1
Ellie Richard's Commercial Flooring instals stone, tile, and carpet flooring in office buildings,
condominiums, and restaurants.The company traces labour and materials to each job, but
overhead is assigned based on labour hours. At the start of the year, the company estimated
overhead as follows:
 Rent $35,000

Depreciationoftrucks 25,000

Depreciationofequipments 5,000

SupervisorSalaries 150,000

OtherOverheads 20,000

$235,000

Total labour hours were estimated to be 11,520.

During the first week in December, the company started and completed a job installing black
granite tiles in the remodelled lounge of Joey D's Restaurant. In total, the job took 36 hours.
The average wage rate of installers is $35 per hour. Materials for the job including tiles and
grouting cost $7,500.

Required
a. Whatisthecostofthejob?

● Labourcost=$35perhourx36hours=$1,260
● Materialcost=$7,500
● Costofthejob=Labourcost+materialcost=$8,760
b. Assumingthatthecompanycharges$80perinstallerhourplusthecostofmaterials
with a markup of 30 percent, what was the profit on the job?

● Allocationrate=totalmanufacturingoverheads/labourhours
● Allocation rate = $235,000 / $11,520 = $20.39

a. 36 hours x $35 per hour + $7,500 + $20.39 x 36 =

$9494.04
b. 36 hours x $80 per hour + (1.30 x $7,500) =
$12,630

Profit = 12630 - 9494.04 = $3,135.96

ÉXERCISE 2-10. Overhead Allocation Bases [LO 7] Lawler Manufacturing Company expects
annual manufacturing overhead to be $800,000. The company also expects 50,000 direct
labour hours costing $1,600,000 and machine run time of 25,000 hours.

Required
Calculate overhead allocation rates based on direct labour hours, direct labour cost, and
machine time.

Overhead Allocation Rate based on Direct Labour Hours:

1
. Overhead
Overhead Allocation
Allocation Rate (DLH)
Rate based = Annual
on Direct Manufacturing
Labor Cost: Overhead/Total Direct Labor Hours

2 Overhead
Overhead Allocation Rate based
Allocation on Machine
Rate (DLC) Time:
= Annual Manufacturing Overhead/Total Direct Labor Cost
.
Overhead Allocation Rate (Machine Hours) = Annual Manufacturing Overhead/Total Machine
3 Run Time
.
4
.
Given:
● Annual Manufacturing Overhead = $800,000
● Total Direct Labour Hours = 50,000 hours
● Total Direct Labour Cost = $1,600,000
● Total Machine Run Time = 25,000 hours

1. Overhead Allocation Rate based on Direct Labour Hours (DLH):

Overhead Allocation
$16 per hourRate (DLH)=$800,00050,000 hours =

2. Overhead Allocation Rate based on Direct Labor Cost (DLC):

Overhead Allocation Rate (DLC) = $800,000/$1,600,000 = $0.50 per dollar of labour cost

3. Overhead Allocation Rate based on Machine Time (Machine Hours):

Overhead Allocation
$32 per hourRate (Machine Hours) = $800,000/25,000 hours =

Exercise 2 - 12. Allocating Manufacturing Overheads to Jobs [LO 6,7]: Webber Fabricating
estimated the following annual costs.

Expected annual direct labour 40,000

hours Expected annual direct $625,000

labour costs Expected machine 20,000

hours $800,000

Expected material cost for the year $1,000,000

Expected manufacturing overheads

Required

1. Calculateoverheadallocationratesusingeachofthefourpossibleallocationbases
provided.
Given:

● Expected annual direct labour hours = 40,000 hours

● Expected annual direct labour costs = $625,000
● Expected machine hours = 20,000 hours
● Expected material cost for the year = $800,000
● Expected manufacturing overheads = $1,000,000

a. Overhead Allocation Rate based on Direct Labour Hours (DLH):

OverheadAllocationRate(DLH)=$1,000,000/40,000hours=$25perhour

a. OverheadAllocationRatebasedonDirectLabourCosts(DLC):
Overhead Allocation Rate (DLC) = $1,000,000/$625,000 = $1.60 per dollar
of labour cost

b. OverheadAllocationRatebasedonMachineHours(MachineHours):
Overhead Allocation Rate (Machine Hours) = $1,000,000/20,000 hours = $50
per hour

c. OverheadAllocationRatebasedonMaterialCosts(MaterialCosts):
Overhead Allocation Rate (Material Costs) = $1,000,000/$800,000 = $1.25
per dollar of material cost

2. Determine the cost of the following jobs (number 253) using each of the four
overhead allocation rates.
Job 253

Directmaterials $3,000

Directlabour(150hrs@$12/hr) $1,800

Machinehoursused 150

1. Overhead Allocation based on Direct Labour Hours (DLH):

● OverheadAllocation(DLH)=OverheadAllocationRate(DLH)*DirectLabourHours
● UsingthecalculatedOverheadAllocationRate(DLH)of$25perhour:Overhead
Allocation (DLH) = $25 * 150 hours = $3,750

Total Cost of Job 253 (DLH) = Direct Materials Cost + Direct Labor Cost + Overhead
Allocation (DLH)
Total Cost of Job 253 (DLH) = $3,000 + $1,800 + $3,750 =

2. $8,550 Overhead Allocation based on Direct Labour Costs

● OverheadAllocation(DLC)=OverheadAllocationRate(DLC)*DirectLabourCost
●
(DLC):
UsingthecalculatedOverheadAllocationRate(DLC)of$1.60perdollaroflabour
cost: Overhead Allocation (DLC) = $1.60 * $1,800 = $2,880
●
Total Cost of Job 253 (DLC) = Direct Materials Cost + Direct Labor Cost + Overhead
Allocation (DLC)
Total Cost of Job 253 (DLC) = $3,000 + $1,800 + $2,880 = $6,680

3. Overhead Allocation based on Machine Hours (Machine

●OverheadAllocation(MachineHours)=OverheadAllocationRate(MachineHours)*
Hours): Hours Used
Machine
●
UsingthecalculatedOverheadAllocationRate(MachineHours)of$50perhour:
Overhead Allocation (Machine Hours) = $50 * 150 hours = $7,500

Total Cost of Job 253 (Machine Hours) = Direct Materials Cost + Direct Labor Cost +
Overhead Allocation (Machine Hours)
Total Cost of Job 253 (Machine Hours) = $3,000 + $1,800 + $7,500 = $12,300
 4. Overhead Allocation based on Material Costs (Material Costs):
●
OverheadAllocation(MaterialCosts)=OverheadAllocationRate(MaterialCosts)*
Material Costs
●UsingthecalculatedOverheadAllocationRate(MaterialCosts)of$1.25perdollarof
material cost: Overhead Allocation (Material Costs) = $1.25 * $3,000 = $3,750

Total Cost of Job 253 (Material Costs) = Direct Materials Cost + Direct Labor Cost +
Overhead Allocation (Material Costs)
Total Cost of Job 253 (Material Costs) = $3,000 + $1,800 + $3,750 = $8,550

Therefore, the cost of Job 253 using each overhead allocation rate is:

● DirectLabourHours(DLH):$8,550
● DirectLabourCosts(DLC):$6,680
● MachineHours(MachineHours):$12,300
● MaterialCosts(MaterialCosts):$8,550

EXERCISE 2-15. Cost of Jobs [LO 3, 6] Milton Company is a steel fabricator, and job 325
consists of producing 600 steel supports for Wendell Construction Company. Overhead is
applied on the basis of direct labour hours, using a predetermined overhead rate of $20 per
hour. Direct costs associated with Job 325 are: direct materials, $8,000; direct labour, 200
hours at $18 per hour.
Required
Calculate the cost of Job 325.

Given:

●
Direct Materials
Cost:$8,000
●
Direct Labour Cost:
200hoursat$18perhour
● Predetermined Overhead Rate:
$20perhour
●
1. DirectCostsforJob325:
● DirectMaterialsCost:$8,000
● DirectLabourCost:200hours*$18perhour=$3,600
2. AppliedOverheadforJob325:
● AppliedOverhead=DirectLabourHours*PredeterminedOverheadRate
● AppliedOverhead=200hours*$20perhour=$4,000
Now, let's calculate the total cost of Job 325 by adding the direct costs and the applied overhead:

Total Cost of Job 325 = Direct Materials Cost + Direct Labor Cost + Applied Overhead Total Cost of
Job 325 = $8,000 + $3,600 + $4,000 = $15,600

Therefore, the cost of Job 325 is $15,600.

PROBLEM 2-7. Underapplied or Overapplied Overhead [LO 7,8] In the past year, Oak Crafters
Cabinets had total revenue of $2,000,000, cost of goods sold of $800,000 (before adjustment
for over- or underapplied overhead), administrative expenses of $400,000, and selling
expenses of $200,000. During the year, overhead was applied using a predetermined rate of
60 percent of direct labour cost. Actual direct labour was $500,000. Actual overhead was
$250,000. The ending balances in the inventory accounts (prior to adjustment for
underapplied overhead) are:

Raw Materials Inventory $24,000

Work in progress inventory 60,000

Finished Goods inventory 30,000

Required

A. Calculatenetincometreatingtheamountofoverrappliedoverheadisimmaterialand
assigning it to Cost of Goods Sold.

Calculate Net Income Treating Overapplied Overhead as Immaterial and Assigning it to Cost of
Goods Sold (COGS):

a. Calculate the Overapplied Overhead:

OverappliedOverhead = ActualOverhead − AppliedOverhead

OverappliedOverhead = ActualOverhead − AppliedOverhead

Overapplied Overhead = $250,000 - ($500,000 * 60%) = $250,000 - $300,000 =

-$50,000

b. Adjust COGS for Overapplied Overhead:

AdjustedCOGS = COGS + OverappliedOverhead

AdjustedCOGS = COGS + OverappliedOverhead Adjusted COGS =

$800,000 + (-$50,000) = $750,000

c. Calculate Net Income:

NetIncome = TotalRevenue − COGS − AdministrativeExpenses − SellingExpenses

NetIncome = TotalRevenue − COGS − AdministrativeExpenses − SellingExpenses

Net Income = $2,000,000 - $750,000 - $400,000 - $200,000 = $650,000

B. Calculatenetincometreatingtheamountofoverappliedoverheadasmaterialand
apportioning it to the appropriate inventory accounts and Cost of Goods Sold. Round
to the nearest whole dollar.

a. Calculate the Overapplied Overhead:

Overapplied Overhead = Actua lOverhead − Applied Overhead

Overapplied Overhead = Actual Overhead − Applied Overhead

Overapplied Overhead = $250,000 - ($500,000 * 60%) = $250,000 - $300,000 =

-$50,000

b. Apportion Overapplied Overhead to Inventory and COGS based on ending balances:

● RawMaterialsInventory:
$24,000 / ($24,000 + $60,000 + $30,000) * $50,000 =
$6,000
● WorkinProgressInventory : $60,000 / ($24,000 + $60,000 + $30,000) * $50,000 =

● FinishedGoodsInventory:
$15,000
$30,000 / ($24,000 + $60,000 + $30,000) * $50,000 =

● AdjustCOGSfortheremainingOverappliedOverhead:
$9,000

● Remaining Overapplied Overhead = Overapplied Overhead−(Apportioned Inventory)

● Remaining Overapplied Overhead=Overapplied Overhead−(Apportioned To
Inventory) Remaining Overapplied Overhead = -$50,000 - ($6,000 + $15,000 +
$9,000) = -$50,000 - $30,000 = -$80,000

c. Adjust COGS for Remaining Overapplied Overhead:

Adjusted COGS = COGS + Remaining Overapplied Overhead

Adjusted COGS = COGS + Remaining Overapplied Overhead Adjusted COGS =

$800,000 + (-$80,000) = $720,000

d. Calculate Net Income:

Net Income = Total Revenue − Adjusted COGS − Administrative Expenses− SellingExpenses

Ne tIncome = Total Revenue − Adjusted COGS − Administrative Expenses − Selling

Expenses Net Income = $2,000,000 - $720,000 - $400,000 - $200,000 = $680,000

C. Discusstheimpactofthealternativetreatments.
a. Treating Overapplied Overhead as Immaterial and Assigning it to COGS ($650,000
Net Income): This method results in a lower net income because the overapplied
overhead is directly deducted from COGS, reducing expenses.
b. Treating Overapplied Overhead as Material and Apportioning it ($680,000 Net
Income): This method results in a higher net income compared to the first method. By
 apportioning the overapplied overhead to inventory accounts, the remaining
overapplied overhead is then adjusted against COGS, leading to a higher net income.

PROBLEM 2-8. Underapplied or Overapplied Overhead [LO 8] World Window Company

produces custom windows to specifications provided by architects. At the end of its
accounting period, its account balances indicated the following:

Raw Material Inventory $80,000

Work in progress inventory 66,000

Finished Goods inventory 44,000

Costs of Goods sold 440,000

Manufacturing overhead (credit balance) 50,000

Required

A. DeterminetheadjustedbalancesoftheaccountsifthebalanceinManufacturing
Overhead is considered immaterial in amount and assigned to Cost of Goods Sold.

Since Manufacturing Overhead is considered immaterial , it will be directly assigned to Cost of

Goods Sold (COGS).

Adjusted COGS = COGS + Manufacturing Overhead

Adjusted COGS = COGS + Manufacturing Overhead Adjusted COGS = $440,000 + $50,000 =

$490,000

The balances of Raw Material Inventory, Work in Progress Inventory, and Finished Goods
Inventory remain the same since the Manufacturing Overhead is not apportioned to these
accounts.

B. DeterminetheadjustedbalancesoftheaccountsifthebalanceinManufacturing
Overhead is considered material in amount. Round to the nearest whole dollar.

Since Manufacturing Overhead is considered material

, it will be apportioned among Raw Material
Inventory, Work in Progress Inventory, Finished Goods Inventory, and COGS based on their
proportional balances.

a. Calculate the Total Balance for Apportionment:

Total Balance for Apportionment = Raw Material Inventory + Work In Progress Inventory + Finished
Goods Inventory + COGS
Total Balance for Apportionment = Raw Material Inventory + Work in Progress Inventory + Finished
Goods Inventory + COGS Total Balance for Apportionment = $80,000 + $66,000 + $44,000 +
$440,000 = $630,000

b. Calculate the Percentage for Each Account:

● RawMaterialInventory:$80,000/$630,000=12.70%
● WorkinProgressInventory:$66,000/$630,000=10.48%
● FinishedGoodsInventory:$44,000/$630,000=6.98%
● COGS:$440,000/$630,000=69.84%
c. Apportion Manufacturing Overhead to Each Account:

● RawMaterialInventory:12.70%*$50,000=$6,350
● WorkinProgressInventory:10.48%*$50,000=$5,240
● FinishedGoodsInventory:6.98%*$50,000=$3,490
● COGS:69.84%*$50,000=$34,920
Now, calculate the adjusted balances for each account:

● RawMaterialInventory:$80,000+$6,350=$86,350
● WorkinProgressInventory:$66,000+$5,240=$71,240
● FinishedGoodsInventory:$44,000+$3,490=$47,490
● COGS:$440,000+$34,920=$474,920
Therefore, the adjusted balances of the accounts are:

● RawMaterialInventory:$86,350
● WorkinProgressInventory:$71,240
● FinishedGoodsInventory:$47,490
● COGS:$474,920

Part 2: Classroom Content-based questions

1. Differentiate between product costs and period costs

Product Costs:

● Thesearethecostsdirectlytiedtomakingthestuffacompanysells.
● Thinkofitasthemoneyspentoningredients(likeflourandeggsforabakery)andthe
workers who actually put those ingredients together (like the bakers).
● Italsoincludesthingslikerentforthebakeryspace,electricitytoruntheovens,andthe
machines used to mix the dough.
● Thesecostsareconsideredaninvestmentbecausetheygointocreatingtheproductsthatthe
company sells.
● Theystayonthebooksasassetsuntiltheproductsaresold,atwhichpointtheymoveoverto
the expenses side of things as Cost of Goods Sold (COGS) on the income statement.

Period Costs:
 ● These are the costs that keep the business running day to day, regardless of how many
products are made or sold.
● They cover things like advertising to get people to buy the bakery's goods, salaries for the sales
team, and the rent for the office where orders are managed.
● Unlike product costs, period costs are expensed right away in the period they occur.
● They're part of the ongoing costs of doing business, like keeping the lights on and paying
employees' salaries.
● You'll see period costs listed as operating expenses on the income statement, showing what it
takes to keep the business going, not just what goes into making the products themselves.

2. Whatdoyouunderstandbyoverappliedandunderappliedoverheads?
How are they adjusted at the end of the FY?

Overapplied and underapplied overheads are terms used in accounting to describe the difference
between the actual manufacturing overhead costs incurred during a fiscal year (FY) and the overhead
costs applied to production based on a predetermined rate.

● OverappliedOverhead:Thisoccurswhenthetotalamountofmanufacturingoverheadapplied
to production using the predetermined rate is higher than the actual overhead costs incurred
during the FY. In other words, the company applied more overhead to its products than it
actually spent.
● UnderappliedOverhead:Conversely,underappliedoverheadhappenswhenthetotalamount
of manufacturing overhead applied to production is less than the actual overhead costs
incurred during the FY. This means that the company applied less overhead to its products
than it actually spent.

At the end of the fiscal year, overapplied and underapplied overheads need to be adjusted to
accurately reflect the company's financial records. Here's how they are typically adjusted:

1. OverappliedOverheadAdjustment:
● Iftheamountofoverappliedoverheadisimmaterial,itcanbedirectlyallocatedor
assigned to Cost of Goods Sold (COGS). This means that the excess overhead
applied to production is transferred from the manufacturing overhead account to
COGS on the income statement.
● ThejournalentrytoadjustforoverappliedoverheadwouldinvolvedebitingCOGS
and crediting Manufacturing Overhead.
2. UnderappliedOverheadAdjustment:
● Iftheamountofunderappliedoverheadisimmaterial,itcanbeallocatedamong
various accounts (such as inventory accounts and COGS) based on a predetermined
allocation method. This helps distribute the underapplied amount across different
expense or asset accounts.
● Thejournalentrytoadjustforunderappliedoverheadmayinvolvedebitingvarious
accounts (e.g., inventory accounts, COGS) and crediting Manufacturing Overhead.