Ath the end of 2010, Jackson Tank Company\'s accounts showed a $66,000 credit ba

Question

Ath 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:
WIP Inventory: $384,000
Finished Goods Inventory: $96,000
Cost of Goods Sold: $720,000

1. Prepare the necessary journal entry to close the overhead account if the balance is considered immaterial.
2. Prepare the necessary journal entry to close the overhead account if the balance is considered material.
3. Which method do you believe is more appropriate for the company and why?

Explanation / Answer

1. Prepare the necessary journal entry to close the overhead account if the balance is considered immaterial.

Manufacturing Overhead           $66,000
   Cost of goods sold                               $66,000
____________________________________________
2. Prepare the necessary journal entry to close the overhead account if the balance is considered material.
  
Manufacturing Overhead           $66,000
   WIP Inventory                                      $21,1201             
   Finished Goods Inventory                       $5,2802
    Cost of goods sold                               $39,6003
_________________________________________________

1WIP   ------- $66,000 x $384,000 / (384,000+96,000+720,000)
                  = $66,000 x $384,000 / $1,200,000 = $21,120
2FG    ------- $66,000 x $96,000 / (384,000+96,000+720,000)
                  = $66,000 x $96,000 / $1,200,000 = $5,280
3COGS ------- $66,000 x $720,000 / (384,000+96,000+720,000)
                 = $66,000 x $720,000 / $1,200,000 = $39,600

3. Which method do you believe is more appropriate for the company and why

Allocation of under or overapplied overhead between Work In Process, Finished Goods Inventory, and Cost of goods sold (COGS) is more accurate than closing the entire balance into cost of goods sold. The reason is that allocation assigns overhead costs to where they would have gone in the first place had it not been for the errors in the estimates going into the predetermined overhead rate.

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