1.Explain how manufacturing costs flow through the various accounts to wind up in Finished Goods Inventory....

1.Explain how manufacturing costs flow through the various accounts to wind up in Finished Goods Inventory.

2.What causes the Manufacturing Overhead account to be under or over applied (allocated) and what steps, if any, are taken to clear the balance at the end of the accounting period?

Expert Solution

Question 1:

Manufacturing costs include direct materials, direct labour and manufacturing overheads.

These items when purchased will be debited to respective accounts like raw material purchase account, Wages account etc....

When they are issued to production they are debited to Work in process account and credited from the respective account of manufacturing cost.

As and when goods are finished and ready for sale they are debited to Finished goods account by crediting work in process account.

From finished goods the goods that are sold will be debited to cost of sales account by crediting finished goods account.

Flow: Raw materials / Labour ------ Work in process account --------- Finished goods account

Question 2:

Manufacturing overheads are not readily traceavle to each and every product and actual overheads is known only at the end of reporting period but the production and sales continues through out the year. So to determine the cost of a product manufacturing overheads are alloacted to product using a pre determined rate decided at the beginning of the year. Actual overheads spent will vary with the allocated overheads.

This is the reason for under or over absorption(allocation) of overheads.

Steps to clear the balance:

If it is over absorption then the balance is credited to profit or loss account.

If it is under absorption then the balance is debited to profit or loss account.

ekkarill92 answered 1 year ago

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