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Allocated vs. Actual Overhead Directly to Cost of Goods Sold

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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.

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

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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 ...

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