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Multiple Choice
When recording the application of factory overhead in a journal entry, how should factory overhead variances be treated?
A
They should be closed to Cost of Goods Sold at the end of the period.
B
They should be credited directly to Work in Process Inventory.
C
They should be recorded as a liability on the balance sheet.
D
They should be debited to Raw Materials Inventory.
Verified step by step guidance
1
Understand the concept of factory overhead variances: Factory overhead variances occur when the actual overhead costs differ from the applied overhead costs. These variances need to be accounted for to ensure accurate financial reporting.
Recall the treatment of variances: At the end of the accounting period, any factory overhead variances are typically closed to the Cost of Goods Sold (COGS) account. This ensures that the variances are reflected in the company's profitability for the period.
Eliminate incorrect options: Factory overhead variances are not credited directly to Work in Process Inventory, as this account reflects the costs of unfinished goods. They are also not recorded as a liability on the balance sheet, as variances are not obligations owed by the company. Lastly, they are not debited to Raw Materials Inventory, as this account pertains to the cost of raw materials on hand.
Prepare the journal entry: To close the factory overhead variances, you would debit or credit the Factory Overhead account (depending on whether the variance is underapplied or overapplied) and offset this with a corresponding entry to the Cost of Goods Sold account.
Finalize the adjustment: By closing the variances to COGS, the financial statements accurately reflect the total cost of production, including any discrepancies between actual and applied overhead.