Docksider Boats uses a job order cost accounting system. During one month Docksi

Question

Docksider Boats uses a job order cost accounting system. During one month Docksider purchased $153,000 of raw materials on credit; issued materials to production of $164,000 of which $24,000 were indirect. Docksider incurred a factory payroll of $95,000, paid in cash, of which $25,000 is classified as indirect labor. Docksider uses a predetermined overhead application rate of 170% of direct labor cost. The journal entry to record the application of factory overhead to production is:

Debit Goods in Process Inventory $55,800; credit Factory Overhead $55,800.

Debit Goods in Process Inventory $161,500; credit Factory Overhead $161,500.

Debit Goods in Process Inventory $119,000; credit Factory Overhead $119,000.

Debit Factory Overhead $119,000; credit Goods in Process Inventory $119,000.

Debit Goods in Process Inventory $95,000; credit Factory Payroll $95,000.

Explanation / Answer

Job Order cost accounting system is an accounting system where direct costs are traced and indirect costs are allocated to specific jobs for which they are spent. Indirect costs are applied to the jobs using a pre-determined allocation rate.

Docksider Boats uses a predetermined overhead allocation rate of 170% of direct labor cost. When the direct labor is paid, the expense is debited and credited with cash. After that 170% of expense needs to be allocated as factory overhead to the Job. That means 170% of the direct labor is charged to the work in process inventory and credited to Factory overhead.

So first we need to find out the direct labor paid and apply 170% to that. Total Factory payroll is $95,000

Out of that $25,000 is indirect. The remaining $70,000 (95,000 – 20,000) is direct labor. 170% of $70,000

Is 170% * 70,000 = $119,000. Hence the journal entry to record the application of factory overhead to production is:

Debit Goods in Process Inventory $119,000; credit Factory Overhead $119,000.

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