In accounting for an immaterial amount of overapplied overhead, which of the following is part of the adjusting entry?
a. A debit to the Work in Process Inventory account
b. A debit to the Overhead account
A debit to the Cost of Goods Sold account
c. A credit to the Overhead account
a credit to the overhead account
To determine which of the options is part of the adjusting entry for an immaterial amount of overapplied overhead in accounting, we need to understand the concept of overhead and how it is allocated to different accounts.
Overhead refers to indirect costs incurred by a company that cannot be directly assigned to a specific product or service. It includes expenses such as rent, utilities, and depreciation. To allocate overhead to different accounts, companies use predetermined overhead rates based on estimated costs and production levels.
When actual overhead costs differ from the estimated overhead costs used to calculate the predetermined overhead rate, there can be a difference called either overapplied or underapplied overhead. Overapplied overhead means that more overhead was allocated to the products than was actually incurred.
To adjust for overapplied overhead, the adjusting entry is typically made at the end of the accounting period. Generally, the adjusting entry involves reducing the balance in the Overhead account and transferring it to another appropriate account, depending on the materiality of the amount.
Considering the options given:
a. A debit to the Work in Process Inventory account - This option involves reducing the balance in the Work in Process Inventory account. However, since the question specifies an immaterial amount, it is unlikely that such adjustment would directly affect the Work in Process Inventory account. Thus, it is unlikely to be the correct answer in this case.
b. A debit to the Overhead account - This option involves reducing the balance in the Overhead account. Since the question refers to adjusting for overapplied overhead, reducing the balance in the Overhead account is a logical adjustment to make. This would be the correct answer for this question.
c. A credit to the Overhead account - This option involves increasing the balance in the Overhead account, which is the opposite of what is required to adjust for overapplied overhead. Therefore, this option is unlikely to be the correct answer.
d. A debit to the Cost of Goods Sold account - Adjusting for overapplied overhead does not directly involve the Cost of Goods Sold account. Therefore, this option is unlikely to be the correct answer.
In conclusion, the correct answer is: b. A debit to the Overhead account.