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Allocated vs. Actual Overhead Directly to Cost of Goods Sold

Jacobs Company manufactures refrigerators. The company uses a budgeted indirect-cost rate for its manufacturing operations and during 2005 allocated $1,000,000 to work-in-process inventory. Actual overhead incurred was $1,100,000.

Ending balances in the following accounts are:

Work in Process $100,000
Finished Goods $750,000
Cost of Goods Sold $4,150,000

a. Prepare a journal entry to write off the difference between allocated and actual overhead directly to Cost of Goods Sold. Be sure your journal entry closes the related overhead accounts.

b. Prepare a journal entry that prorates the write-off of the difference between allocated and actual overhead using ending account balances. Be sure your journal entry closes the related overhead accounts.

Solution Preview

a. The Credit balance in the overhead account is the allocation of $1,000,000 and the debit balance is the actual overhead of 1,100,000. The balance in the overhead account is $100,000 Dr. The entry to close this amount to ...

Solution Summary

The solution discusses the differences between allocated and actual overhead directly to cost of goods sold.

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