Question

1.) What are the inventory accounts found in the accounting system of a manufacturing company, of a retail company, and of a custom service company (law firm, accounting firm, e.g.)?

2.) ABC company applies manufacturing overhead on the basis of machine-hours, using a predetermined overhead rate. At the end of the current year, the manufacturing overhead account has a credit balance. What are the possible explanations for this? What disposition should be made of this balance?

Answer 1

1) Inventory accounts

Manufacturing company:

· Finished goods inventory

· Work in process inventory

· Raw material inventory

Retail Company:

· Finished goods inventory

No inventory of work in process and raw material in case of Retail Company since there is no manufacturing activity involved.

Customer Service Company: – No inventory in case of Service Company since service is 100% rendered and cannot be delivered partially

2) When there is credit balance in manufacturing overhead account the overhead is over-applied based on machine hours. It means the actual machine hours used is more than the pre-determined machine hours. When there is an over-applied manufacturing overhead the closing balance is credit balance. The over-applied overheads can be disposed off in 2 ways

· Dispose off to cost of goods sold if it is insignificant

· Dispose off to work in process inventory, finished goods inventory and cost of goods sold based on proportion of balances in these accounts.