Estimated overhead and direct labor costs for the year were $112,500 and $125,00

Question

Estimated overhead and direct labor costs for the year were $112,500 and $125,000, respectively. During the year, actual overhead was $107,400 and actual direct labor cost was $120,000. The entry to close the over- or underapplied overhead at year-end, assuming an immaterial amount, would include:
A.A credit to Factory Overhead for $600.
B.A credit to Cost of Goods Sold for $600.
C.A credit to Finished Goods Inventory for $600.
D.A debit to Cost of Goods Sold for $600.
E.A debit to Goods in Process Inventory for $600.

Explanation / Answer

If based on direct labour costs of $125,000, they estimated overhead at $112,500, they're using 90% of direct labour costs to estimate overhead. So if direct labour costs turned out to be $120,000, the overhead should have been 90% or $108,000, but it turned out to be even less, at $107,400, which means there is a favourable variance of $108,000 - $107,400 = $600. Since it's a favourable variance, it's a credit to COGS, to bring down the cost.

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