Q16RQ. - Horngren'S Financial And Managerial Accounting

Question

Question: Explain the journal entry for the allocation of overhead. What accounts are affected? Are they increased or decreased?

Step-by-Step Solution

Answer

Answer:

To allocate manufacturing overhead, Work-in-Process Inventory is debited and Manufacturing Overhead is credited. Work-in-Process Inventory is treated as an current asset, and increase the assets of the company and Manufacturing Overhead is decreased, which increases equity of the company.

Step 1: Current assets

Current assets of the company means the assets which are realizable into cash at any time or within the one year. Inventory, cash, debtors are considered as the current assets.  

Step 2: Journal entry to record the allocation of overhead.

Date	Particulars	Debit ($)	Credit ($)
	Work-in-process inventory	XXX
	Manufacturing overheads		XXX

 

This transaction increases the assets of the company and decreases the equity. Manufacturing overhead is an expense which reduces the net income of the company and which may lead to decrease in equity.