Question

For its first month of operations, Stellar Company worked on only two jobs--Job X and Job Y. Job X consisted of 500 units, 400 of which were sold to customers and 100 of which remained in Finished Goods at the end of the month. Job Y consisted of 200 units and it was incomplete at the end of the month. The company also provides the following data:

Predetermined overhead rate (POHR)
Actual direct labor hours (DLHs) used in each job:

Job X

Job Y
Actual manufacturing overhead costs incurred during the month

$ 4 per DLH

15,000 DLHs

10,000 DLHs $ 95,000

Stellar closes any under-applied or over-applied overhead proportionally to Work in Process, Finished Goods, and Cost of Goods Sold at the end of every month.

Which of the following statements is true regarding the journal entry to close any under-applied or over-applied overhead for Stellar at the end of the month?

1. The journal entry includes a credit to the Manufacturing Overhead (MOH) account for $5,000.

2. The journal entry includes a credit to the Work in Process (WIP) account for $600.

3. The journal entry includes a credit to the Cost of Goods Sold (COGS) account for $5,000.

4. The journal entry includes a credit to the Direct Material (DM) account for $600.

5. The journal entry includes a credit to the Finished Goods (FG) account for $600.

Answer 1

Solution:

Applied overhead = 15000*4 + 10000*4 = $100,000

Overapplied overhead = Applied - actual Overehad = $100000 - $95000 = $5000 Overapplied

Overapplied overhead For Job X and Job Y will be in the ratio of 15000:10000 respectively, therefore,

Overapplied overhead For Job X = $5000*15000/25000 = $3000

Overapplied overhead For Job Y = $5000 - 3000 = $2000

Now,

Job Y (WIP) = Credit to Work in process account = $2000

And,

Job X = 400 units cost of goods sold and 100 units in Finished goods inventory

Credit to cost of goods sold = $3000*400/500 = $2400

Credit to Finished goods inventory = $3000*100/500 = $600

Hence, "The journal entry includes a credit to the Finished Goods (FG) account for $600" is correct answer.

Last option is correct.