In recording applied overhead costs, the factory overhead account is:

• A. Credited
• B. Debited
• C. Closed to Cost of Goods Sold
• D. Not affected

Answer: (A)

Verified step by step guidance

1. Understand the concept of applied overhead: Applied overhead refers to the estimated overhead costs allocated to production based on a predetermined rate, often calculated using direct labor hours, machine hours, or another activity base.
2. Recognize the role of the factory overhead account: The factory overhead account is used to track actual overhead costs incurred and applied overhead costs during production. It helps ensure that overhead costs are properly allocated to products or jobs.
3. Determine the accounting treatment for applied overhead: When overhead is applied to production, the factory overhead account is credited to reduce the balance of overhead costs. This reflects the allocation of overhead to specific jobs or products.
4. Understand the double-entry system: In the double-entry accounting system, the credit to the factory overhead account is accompanied by a debit to the Work-in-Process (WIP) inventory account, indicating that the overhead costs are now part of the production costs.
5. Review the closing process: At the end of the accounting period, any remaining balance in the factory overhead account (overapplied or underapplied overhead) is typically closed to Cost of Goods Sold or allocated to other accounts, depending on company policy.