Question

Valor company is planning to implement an activity-based costing (ABC) system to apply overhead costs to products. Three activities were identified and rates were calculated for each activity.

Purchase requisitions:	$5 per requisition processed
Production setup:	$20 per setup
Quality control:	$30 per inspection

Assume 600 purchase requisitions were processed, 1,200 production setups were performed, and 300 products were inspected for the year. Which of the following journal entries would be made by Valor to record the application of overhead?

		Work in Process Inventory         36,000           Manufacturing Overhead                   36,000
		Manufacturing Overhead            36,000           Work in Process Inventory                 36,000
		Manufacturing Overhead            36,000           Finished Goods Inventory                  36,000
		Finished Goods Inventory          36,000          Work in Process Inventory                  36,000
		None of the answer choices is correct.

Answer 1

Work in Progress $36000

Manufacturing Overhead   $36000

Overhead application is the fixed-rate applied to a specific production expense in order to capitalize some overhead expenses into inventory.

When the overhead is incurred, it is recorded as the debit in the manufacturing expense account. Therefore, when the overhead is applied or allocated to the jobs, the manufacturing expenses at the estimated rate are credited in the manufacturing expense account.

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