There are two types of overhead:
Actual overhead : Costs are tracked throughout the year in the overhead account.
Applied overhead: Costs are computed throughout the year and added to actual direct materials and actual direct labor to get total product cost
If actual overhead is less than applied overhead, then the variance is called over-applied overhead.
When Cost of Goods Sold is adjusted for over-applied overhead, the cost will decrease because the over-applied overhead is subtracted from Cost of Goods Sold.
The over-applied overhead is deducted from the cost of Goods sold because the applied overhead, which was predetermined, was more than the actual overhead. However, at year-end, cost reported on the financial statements must be actual amounts. Thus, the over-applied overhead is deducted from Cost of Goods Sold.
Answer: b. work in process
• All costs associated with a job is summarised in job-order cost sheet.
• The job-order cost sheet is a subsidiary account to work-in-progress account and is considered as a primary document for accumulating all the costs that are related to a specific job.
• Hence, option b is correct out of all given options.
A normal cost system determines unit cost by adding actual direct materials, actual direct labor, and estimated overhead. At the beginning of the year overheads are estimated by approximating the year's actual overhead. Unit cost is obtained by using a predetermined rate throughout the year.
a. Actual direct materials, actual direct labor, and estimated (applied) overhead.