at the end of 2010, jackson tank company\'s accounts showed a 66,000 credit bala

Question

at the end of 2010, jackson tank company's accounts showed a 66,000 credit balance in manufacturing overhead control. in addition,the company had the following account balances:
work in process inventory 384,000
finished goods inventory 96,000
cost of goods sold 720,000

a. prepare the necessary journal entry to close the overhead account if the balance is considered immaterial.
b. prepare the necessary journal entry to close the overhead account if the balance is considered material.
c. which method do you believe is more appropriate for the company and why?

Explanation / Answer

a. prepare the necessary journal entry to close the overhead account if the balance is considered immaterial.

If balance is considered immaterial, then the balnce may be directly transferred to Cost of Goods Sold account as follows :

Manufacturing Overhead                                  $66,000
     Cost of Goods Sold                                                            $66,000

 

 

c. which method do you believe is more appropriate for the company and why?

Due to significant amount of over applied overhead $66,000 ( 5.5% i.e. 66,000 / 1,200,000), the method of trnasferring this balance to all related accounts viz. WIP Inventory, Finished goods Inventory and Cost of goods sold would be an ideal method. This method will affect cost of all the respective accounts instead charging it only to COGS account.

b. prepare the necessary journal entry to close the overhead account if the balance is considered material.

Work in progress inventory                      $384,000     = 384,000 / 1,200,000 = 32%
Finished goods inventory                           $96,000     = 96,000 / 1,200,000 =    8%
Cost of goods sold                                   $720,000      = 720,000 / 1,200,000 = 60%
                                                            ----------------                                          ---------
              Total                                      $1,200,000                                             100%
                                                           ===========                                         ======

Manufacturing Overhead                                       $66,000
    WIP Inventory       $66,000 x 32%                                          $21,120
    Finished Goods Inventory  $66,000 x 8%                               $  5,280
    Cost of Goods Sold             $66,000 x 60%                             $39,600

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