Multiple Choice
Which of the following is the correct journal entry when a business contracts services from a third party and agrees to pay later?
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2. Transaction Analysis
Journal Entries: Business Formation Example
Multiple Choice
Which of the following is the correct journal entry to record the allocation of factory overhead to Work in Process?
A
Debit Work in Process; Credit Raw Materials
B
Debit Work in Process; Credit Factory Overhead
C
Debit Factory Overhead; Credit Work in Process
D
Debit Factory Overhead; Credit Raw Materials
Verified step by step guidance1
Understand the concept of factory overhead allocation: Factory overhead includes indirect costs such as utilities, depreciation, and indirect labor. These costs are allocated to Work in Process (WIP) to reflect the production costs incurred.
Recall the journal entry format: When allocating factory overhead to WIP, the Work in Process account is debited because it represents an increase in production costs. The Factory Overhead account is credited to reduce the overhead balance, as these costs are being applied to production.
Analyze the options provided: The correct journal entry should debit Work in Process and credit Factory Overhead, as this reflects the allocation of overhead costs to production.
Eliminate incorrect options: For example, 'Debit Work in Process; Credit Raw Materials' is incorrect because raw materials are not involved in overhead allocation. Similarly, 'Debit Factory Overhead; Credit Work in Process' is incorrect because it reverses the correct accounts.
Select the correct answer: The correct journal entry is 'Debit Work in Process; Credit Factory Overhead,' as it properly allocates factory overhead to production costs.
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