Question

Entry (11) in the below t-account could represent overhead cost applied to work in process. Work in process debit credit balance 40,000 (11) 330,000 (2) 100,000 (3) 90,000 (7) 120,000 balance 20,000. What does entry (11) represent?

1) Overhead cost
2) Debit
3) Credit
4) Balance

Answer 1

Entry (11) represents an overhead cost applied to work in process. Overhead costs are fixed expenses not directly tied to production, and when spread over units produced, result in a declining average fixed cost curve. This concept is known as 'spreading the overhead'.

Step-by-step explanation:

Entry (11) in the given t-account can represent an overhead cost applied to work in process. In accounting, overhead costs refer to the ongoing expenses of operating a business that are not directly tied to the production of a specific product. These costs can include rent, utilities, and salaries of employees not directly involved in production.

When spread over the units produced, this becomes the average fixed cost, which tends to decrease as production increases. To illustrate, if the fixed cost (overhead) is $1,000, and it is distributed over the number of units produced, the average fixed cost curve will slope downwards as production increases. This is known as "spreading the overhead."

As production volume goes up, each unit incurs a smaller portion of the fixed cost, making each unit cheaper to produce in terms of the overhead. This is why large-scale production is often more economical per unit.