Applying Factory Overhead: Overhead Applied Account

This post discusses the meaning of the difference between debits and credits in overhead applied as mentioned and analyzes the difference to determine the spending and idle capacity variances.

The Mechanics of Applying Factory Overhead. Factory overhead is applied to the work done after the direct materials and the direct labor costs have been recorded. If direct labor hours or machine hours are the basis for overhead charges, these data must also be available to the cost department. The job order cost sheets or the departmental cost of production reports receive postings as soon as materials or labor data become available. The journal entry for summarizing overhead applied to job order cost sheets or departmental cost of production reports is:

Work in Process  285,000 Dr
Factory Overhead Applied  285,000 Cr

Charges made to subsidiary records (the job order cost sheets or departmental cost of production reports) list in detail applied factory overhead charged to jobs or departments. The debit to the work in process control account brings total overhead charged into the general ledger or into the factory ledger if factory cost accounts are kept there. The factory overhead applied account is subsequently closed out to the factory overhead control account by the entry:

Factory Overhead Applied   285,000 Dr
Factory Overhead Control                        285,000 Cr

It is common practice to use a factory overhead applied account because it keeps applied costs and actual costs in separate accounts. However, some companies do not use Factory Overhead Applied but post the credit directly to Factory Overhead Control.

Debits to the factory overhead control account are for actual expenses incurred during the period. There may, of course, be credit adjustments to actual factory overhead in the control account (e.g., the return of supplies to the storeroom). Such credits would reduce total actual factory overhead.

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