5 5: Prepare Journal Entries for a Process Costing System Business LibreTexts

Hence, we need to credit the manufacturing overhead account instead to zero it out. This means that without the adjustment, the manufacturing overhead account will have a how puerto ricans are fighting back against using the island as a tax haven credit balance of $500 at the end of the period. Hence, we need to make the journal entry for the overapplied overhead of $500 by debiting that amount into the manufacturing overhead account to zero it out.

Materials cost

The computation of inventory for the packaging department is shown in Figure 5.7.

As the applied overhead is more than the actual overhead, the company needs to make an adjustment for variance between the applied overhead cost and the actual overhead cost by deducting the excess amount from the applied overhead. Likewise, it needs to debit the manufacturing overhead account as in the journal entry above. Overapplied overhead is the result of the manufacturing overhead costs that are applied to the production process is more than the actual overhead cost that actually incurs during the accounting period. In this case, the manufacturing overhead is underapplied by $1,000 ($11,000 – $10,000) as the applied overhead cost is $1,000 less than the actual overhead cost that has occurred during the accounting period. This is due to the company needs to prepare the financial statements with the actual costs that really occur during the accounting period rather than the estimation that is based on the predetermined standard rate.

The correct journal entry to apply manufacturing costs to profit and loss statement processing Department 1 is Debit Manufacturing overhead and Debit Work in process-Department s1. Manufacturing overhead includes indirect material, indirect labor, and other types of manufacturing overhead. It is difficult, if not impossible, to trace manufacturing overhead to a specific product, and yet, the total cost per unit needs to include overhead in order to make management decisions. For example, based on estimation, we credit $10,000 into the manufacturing overhead account to assign the overhead cost to the work in process. However, the actual overhead cost which is debited to the manufacturing overhead account is only $9,500.

Direct Labor Paid by All Production Departments

Likewise, it needs to compare the applied manufacturing overhead cost with the actual cost that occurs during the period to determine whether the overhead has been overapplied or underapplied before making an adjusting entry. In this case, the manufacturing overhead is overapplied by $500 ($10,000 – $9,500) as the applied overhead cost is $500 more than the actual overhead cost that have occurred during the period. This journal entry is the opposite of the overapplied overhead as the remaining balance of the manufacturing overhead, in this case, will be on the debit side at the end of the accounting period instead.

• For another example, assuming the actual overhead cost that has occurred during the period is $11,000 instead while the applied overhead cost is $10,000, the same as the above example.
• The company can make the journal entry for overapplied overhead by debiting the manufacturing overhead account and crediting the cost of goods sold account at the period end adjusting entry.
• However, it is not uncommon to find manufacturing processes where materials are added in the first as well as in one or more subsequent departments.
• Likewise, it needs to debit the manufacturing overhead account as in the journal entry above.

The cost flow and journal entries in process costing system

As the manufacturing overhead costs that are applied to the production are based on the estimation, it rarely is equal to the actual overhead cost that really occurs during the period. In many industries, materials are added only in the first processing department. In subsequent departments, only the design a technology marketing slick labor and manufacturing overhead costs are added.

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• It is difficult, if not impossible, to trace manufacturing overhead to a specific product, and yet, the total cost per unit needs to include overhead in order to make management decisions.
• As the manufacturing overhead costs that are applied to the production are based on the estimation, it rarely is equal to the actual overhead cost that really occurs during the period.
• Likewise, at the period-end adjusting entry, the company ABC can make the journal entry for overapplied overhead by debiting the $500 into the manufacturing overhead account and crediting the same amount into the cost of goods sold account.
• In this case, the manufacturing overhead is overapplied by $500 ($10,000 – $9,500) as the applied overhead cost is $500 more than the actual overhead cost that have occurred during the period.

However, it is not uncommon to find manufacturing processes where materials are added in the first as well as in one or more subsequent departments. The company can make the journal entry for overapplied overhead by debiting the manufacturing overhead account and crediting the cost of goods sold account at the period end adjusting entry. Likewise, at the period-end adjusting entry, the company ABC can make the journal entry for overapplied overhead by debiting the $500 into the manufacturing overhead account and crediting the same amount into the cost of goods sold account. For example, on December 31, the company ABC which is a manufacturing company finds out that it has incurred the actual overhead cost of $9,500 during the accounting period. However, the manufacturing overhead costs that it has applied to the production based on the predetermined standard rate is $10,000 for the period.

On the other hand, the underapplied overhead is the result of the applied manufacturing overhead cost is less than the actual overhead cost that incurs during the accounting period. What is the correct journal entry to apply overhead cost to processing Department #1? For another example, assuming the actual overhead cost that has occurred during the period is $11,000 instead while the applied overhead cost is $10,000, the same as the above example. In the process costing system, a separate work-in-process account is maintained for each department. When the processing work in a particular department is completed, the units, along with their cost, are transferred to the next department for further processing.

This journal entry will remove the remaining balance of $500 in the manufacturing overhead account in order to reflect its actual cost of $9,500. Likewise, after this journal entry, the balance of manufacturing overhead will become zero. After this journal entry, the balance in the manufacturing overhead account will be zero as it should be our goal to make it zero at the end of the accounting period. Of course, we can also look at it from the perspective of cost of goods sold where we need to add more cost with the debit of the cost of goods sold as the applied overhead cost is less than the cost that actually occurs. The importance of properly recording the production process is illustrated in this report on work in process inventory from InventoryOps.com.

The accumulation of costs in a process costing system is simpler than in a job order costing system. Unlike the job order costing system, in which manufacturing costs (materials, labor, and manufacturing overhead) are traced to a large number of individual jobs, the process costing system traces costs to only a few processing departments. On the other hand, the company can make the journal entry for underapplied overhead by debiting the cost of goods sold account and crediting the manufacturing overhead account.