Jupiter Inc. has provided the following data for the month of August. There were no beginning inventories; consequently, the direct materials, direct labor, and manufacturing overhead applied listed below are all for the current month. Manufacturing overhead for the month was underapplied by $2,000.
The company allocates any underapplied or overapplied overhead among work in process, finished goods, and cost of goods sold at the end of the month on the basis of the overhead applied during the month in those accounts.
-The journal entry to record the allocation of any underapplied or overapplied overhead for August would include the following:
A) debit to Cost of Goods Sold of $89,200
B) credit to Cost of Goods Sold of $1,360
C) debit to Cost of Goods Sold of $1,360
D) credit to Cost of Goods Sold of $89,200

Question

Jupiter Inc. has provided the following data for the month of August. There were no beginning inventories; consequently, the direct materials, direct labor, and manufacturing overhead applied listed below are all for the current month.  Manufacturing overhead for the month was underapplied by $2,000.
The company allocates any underapplied or overapplied overhead among work in process, finished goods, and cost of goods sold at the end of the month on the basis of the overhead applied during the month in those accounts.
-The journal entry to record the allocation of any underapplied or overapplied overhead for August would include the following:
A) debit to Cost of Goods Sold of $89,200 
B) credit to Cost of Goods Sold of $1,360 
C) debit to Cost of Goods Sold of $1,360 
D) credit to Cost of Goods Sold of $89,200

Quizplus · Accepted Answer

Since manufacturing overhead was underapplied, there was not enough overhead applied to cover the actual overhead incurred. Therefore, the underapplied amount needs to be allocated to Cost of Goods Sold. The amount to be allocated can be calculated by subtracting the overhead applied ($87,840) from the actual overhead incurred ($89,840), which is $2,000. Since underapplied overhead is a cost, it needs to be debited to Cost of Goods Sold. Therefore, the correct entry would be a debit to Cost of Goods Sold for $1,360 (which is $2,000 less the underapplied amount allocated to Work in Process and Finished Goods) and a credit to Manufacturing Overhead for $1,360.