Serge M. answered • 03/11/17
Tutor
5
(11)
Professor of Accounting, retired. Ph.D., CPA
You have to differentiate between overhead costs incurred and overhead costs applied. Direct material and direct labor are costs of products. indirect materials and indirect labor plus rent and utilities are overhead costs actually incurred. But since you don't know what actual overhead costs will be by the end of the accounting period, estimates are made based on budgets and projections. These estimates are used to arrive at an overhead application rate, which in your case is 200% of direct material cost. In your case the following journal entries would be made:
dr. Work in process . . . 200,000
cr. . . . . payroll payable and other related accounts 200,000 - - direct labor incurred
dr. Work in process . . .150,000
cr. . . . raw materials inventory . . . 150,000 - - direct materials put into production
dr. Mfg overhead control . . . 130,000 - - actual amounts incurred
cr. . . . . Raw materials inventory . . . 60,000 - - indirect materials
cr. . . . .Payroll payable etc . . . . . . .70,000 -- indirect labor
dr. Mfg overhead control . . . 100,000
cr. . . .Rent payable
cr. . . . Utilities payable
The above accounts for actual costs incurred. but we still have to apply overhead
dr. Work in process . . .300,000
cr. . . . . Mfg overhead applied . . . . 300,000
You simply apply overhead at the rate give: 200% of direct materials.
Eventually there will be some difference between Mfg overhead control 9a debit) and Mfg overhead applied (a credit). That difference is over-applied or under-applied overhead and it is used to adjust and correct the amount of cost of goods sold at the end of the accounting period.
