The Factory Overhead Account Will Have A Credit Balance At The End Of A Period If The Overhead Applied During The Period Is Greater Than The Overhead Incurred. True Or FalseA. True B. False

Mar 11, 2025 by ADMIN 191 views

The Factory Overhead Account: Understanding the Concept of Overhead Application and Incurrence

In the realm of accounting, particularly in the context of manufacturing and production, the factory overhead account plays a crucial role in tracking and managing costs. One of the fundamental principles of accounting for factory overhead is the concept of overhead application and incurrence. In this article, we will delve into the concept of factory overhead, its application, and incurrence, and explore the scenario where the factory overhead account will have a credit balance at the end of a period.

What is Factory Overhead?

Factory overhead, also known as manufacturing overhead, refers to the indirect costs incurred by a company in the production process. These costs are not directly attributable to a specific product or job but are necessary for the overall production process. Examples of factory overhead include:

Depreciation of machinery and equipment
Rent and utilities for the factory
Insurance premiums for the factory
Maintenance and repair costs
Supervision and administrative costs

Overhead Application and Incurrence

Overhead application refers to the process of allocating factory overhead costs to products or jobs based on a predetermined rate. This rate is usually calculated by dividing the total factory overhead costs by the total number of units produced or the total number of hours worked. The overhead application rate is then used to calculate the overhead cost of each product or job.

On the other hand, overhead incurrence refers to the actual costs incurred by the company during the production process. These costs are typically recorded as expenses in the accounting records.

The Factory Overhead Account

The factory overhead account is a special account used to track and manage factory overhead costs. The account is typically debited for the overhead costs incurred and credited for the overhead costs applied to products or jobs.

Scenario: Factory Overhead Account with a Credit Balance

Now, let's consider the scenario where the factory overhead account will have a credit balance at the end of a period. This occurs when the overhead applied during the period is greater than the overhead incurred.

True or False?

A. True B. False

Explanation

If the overhead applied during the period is greater than the overhead incurred, it means that the company has applied more overhead costs to products or jobs than the actual costs incurred. This results in a credit balance in the factory overhead account, as the company has effectively "over-applied" overhead costs.

To illustrate this scenario, let's consider an example:

Suppose a company has a total factory overhead cost of $100,000 for the year. The company produces 10,000 units, and the overhead application rate is $10 per unit. The company applies a total of $100,000 in overhead costs to the 10,000 units produced.

However, the actual overhead costs incurred during the year are only $90,000. In this scenario, the factory overhead account will have a credit balance of $10,000, as the company has applied more overhead costs to products or jobs than the actual costs incurred.

Conclusion

In conclusion, the factory overhead account will have a credit balance at the end of a period if the overhead applied during the period is greater than the overhead incurred. This occurs when the company has applied more overhead costs to products or jobs than the actual costs incurred, resulting in an over-application of overhead costs.

Key Takeaways

Factory overhead refers to indirect costs incurred by a company in the production process.
Overhead application refers to the process of allocating factory overhead costs to products or jobs based on a predetermined rate.
Overhead incurrence refers to the actual costs incurred by the company during the production process.
The factory overhead account is a special account used to track and manage factory overhead costs.
A credit balance in the factory overhead account occurs when the overhead applied during the period is greater than the overhead incurred.

Recommendations

Companies should regularly review and adjust their overhead application rates to ensure accurate allocation of overhead costs.
Companies should also monitor their overhead incurrence to ensure that actual costs are not exceeding the applied costs.
The factory overhead account should be regularly reviewed to ensure that it accurately reflects the company's overhead costs.

Final Thoughts

In conclusion, the factory overhead account plays a crucial role in tracking and managing factory overhead costs. Understanding the concept of overhead application and incurrence is essential for accurate accounting and financial reporting. By regularly reviewing and adjusting overhead application rates and monitoring overhead incurrence, companies can ensure accurate allocation of overhead costs and maintain a healthy factory overhead account.
The Factory Overhead Account: A Q&A Guide

In our previous article, we explored the concept of factory overhead, its application, and incurrence, and discussed the scenario where the factory overhead account will have a credit balance at the end of a period. In this article, we will provide a Q&A guide to help you better understand the factory overhead account and its related concepts.

Q&A: Factory Overhead Account

Q1: What is factory overhead?

A1: Factory overhead, also known as manufacturing overhead, refers to the indirect costs incurred by a company in the production process. These costs are not directly attributable to a specific product or job but are necessary for the overall production process.

Q2: What are examples of factory overhead?

A2: Examples of factory overhead include:

Depreciation of machinery and equipment
Rent and utilities for the factory
Insurance premiums for the factory
Maintenance and repair costs
Supervision and administrative costs

Q3: What is overhead application?

A3: Overhead application refers to the process of allocating factory overhead costs to products or jobs based on a predetermined rate. This rate is usually calculated by dividing the total factory overhead costs by the total number of units produced or the total number of hours worked.

Q4: What is overhead incurrence?

A4: Overhead incurrence refers to the actual costs incurred by the company during the production process. These costs are typically recorded as expenses in the accounting records.

Q5: What is the factory overhead account?

A5: The factory overhead account is a special account used to track and manage factory overhead costs. The account is typically debited for the overhead costs incurred and credited for the overhead costs applied to products or jobs.

Q6: When will the factory overhead account have a credit balance?

A6: The factory overhead account will have a credit balance at the end of a period if the overhead applied during the period is greater than the overhead incurred.

Q7: What is the purpose of the factory overhead account?

A7: The purpose of the factory overhead account is to track and manage factory overhead costs, ensuring accurate allocation of overhead costs to products or jobs.

Q8: How often should the factory overhead account be reviewed?

A8: The factory overhead account should be regularly reviewed to ensure that it accurately reflects the company's overhead costs. This should be done at least quarterly, or more frequently if necessary.

Q9: What are the key takeaways from understanding the factory overhead account?

A9: The key takeaways from understanding the factory overhead account include:

Factory overhead refers to indirect costs incurred by a company in the production process.
Overhead application refers to the process of allocating factory overhead costs to products or jobs based on a predetermined rate.
Overhead incurrence refers to the actual costs incurred by the company during the production process.
The factory overhead account is a special account used to track and manage factory overhead costs.
A credit balance in the factory overhead account occurs when the overhead applied during the period is greater than the overhead incurred.

Q10: What are the recommendations for managing the factory overhead account?

A10: The recommendations for managing the factory overhead account include:

Regularly reviewing and adjusting overhead application rates to ensure accurate allocation of overhead costs.
Monitoring overhead incurrence to ensure that actual costs are not exceeding the applied costs.
Regularly reviewing the factory overhead account to ensure that it accurately reflects the company's overhead costs.

Conclusion

Final Thoughts

In this Q&A guide, we have provided answers to common questions related to the factory overhead account. We hope that this guide has helped you better understand the factory overhead account and its related concepts. If you have any further questions or concerns, please do not hesitate to contact us.