What Side of the Manufacturing Overhead Account Is Applied Manufacturing Overhead Entered On?
In the world of accounting, manufacturing overhead refers to the indirect costs incurred during the production process. These costs are not directly associated with a specific product but are necessary for the overall manufacturing operations. Examples of manufacturing overhead costs include rent, utilities, depreciation of machinery, and indirect labor expenses.
To effectively track these costs, companies use a manufacturing overhead account. This account allows for the accumulation and allocation of indirect costs to the products being manufactured. But what side of the manufacturing overhead account is applied manufacturing overhead entered on? Let’s explore the answer to this question in detail.
The manufacturing overhead account is a part of the cost of goods sold (COGS) section on the income statement. It is classified as an expense account and is used to record all indirect costs associated with the manufacturing process. Applied manufacturing overhead, on the other hand, is the actual amount of manufacturing overhead allocated to each product or job.
When it comes to entering applied manufacturing overhead into the manufacturing overhead account, it is typically recorded on the credit side. This means that the credit side of the manufacturing overhead account will be increased while the debit side will remain unchanged. The credit entry represents the allocation of manufacturing overhead costs to the products being produced.
The amount of applied manufacturing overhead is determined using a predetermined overhead rate. This rate is calculated by dividing the estimated total manufacturing overhead costs by a specific cost driver, such as direct labor hours or machine hours. Once the predetermined overhead rate is established, it is used to allocate overhead costs to individual products based on their usage of the cost driver.
Q: Why is manufacturing overhead entered on the credit side of the account?
A: The credit entry for manufacturing overhead represents the allocation of costs to the products being manufactured. By recording it on the credit side, the manufacturing overhead account shows the increase in expenses associated with the production process.
Q: What happens if the applied manufacturing overhead is greater than the actual manufacturing overhead incurred?
A: If the applied manufacturing overhead is greater than the actual overhead incurred, it means that more costs were allocated to the products than were actually incurred. This can happen if the predetermined overhead rate was set too high. In such cases, adjustments may be made to correct the discrepancy.
Q: How is the manufacturing overhead account closed at the end of the accounting period?
A: At the end of the accounting period, any remaining balance in the manufacturing overhead account is closed by transferring it to the cost of goods sold (COGS) account. This ensures that all manufacturing overhead costs are properly accounted for in the calculation of the COGS.
In conclusion, applied manufacturing overhead is entered on the credit side of the manufacturing overhead account. This allows for the proper allocation of indirect costs to the products being manufactured. By using a predetermined overhead rate, companies can accurately assign manufacturing overhead costs to individual products, ensuring accurate cost calculations and financial reporting.