As we have discussed for planning purpose, we need to estimate the overhead absorption rate (OAR) at the start of the year. But the actual figure of the overheads may be more or less. In these circumstances, management/ cost accountant need to take appropriate steps to account for the adjustment.
Journal Entry
| In case of under absorbed overheads | ||
| Cost of goods sold | Debit | |
| Applied Factory Overhead | Credit | |
| In case of over absorbed overheads | ||
| Applied Factory overheads | Debit | |
| Cost of goods sold | Credit |
Example
The FOH Applied is $50,000 while at the end of the year, the actual FOH shows a balance of 45,000. Pass the journal entry to make the adjustment.
Solution
| Description | Debit | Credit |
| Cost of goods sold | 5,000 | |
| Factory Overhead | 5,000 |