Wilson Enterprises applies overhead based on direct labor cost. The company estimates that their overhead for the year will be $240,000, and direct labor cost to be $300,000. Actual direct labor cost for Martinez Manufacturing was $316,000. The journal entry to record manufacturing overhead would include a:

Question

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Manufacturing overhead is applied based on the estimated overhead rate, which in this case is $240,000 / $300,000 = 0.8 or 80%. Therefore, the manufacturing overhead applied to Martinez Manufacturing would be $316,000 x 0.8 = $252,800. The entry to record this would be a credit to Manufacturing Overhead Applied for $252,800. The other options are incorrect because they either debit Work in Process Inventory for the entire direct labor cost or credit Work in Process Inventory for the full amount of manufacturing overhead applied, which does not reflect the overhead rate.

Wilson Enterprises Applies Overhead Based on Direct Labor Cost