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An agency applied $980 of overhead to a project and actual overhead is later fixed at $960. Which account is credited to correct the estimate?
AThe Cost of Services account
BThe Development Costs account
CThe Accounts Receivable account
DThe Wages Payable account
Answer & Solution
Correct answer: A. The Cost of Services account
1. Overhead of $980 was applied as 35% of direct labor while the project was in progress.
2. Actual overhead is determined to be $960, so $20 too much was applied.
3. The $20 is backed out by debiting the Overhead account.
4. The credit goes to Cost of Services rather than Development Costs, because the project has already been invoiced and expensed.
5. Development Costs held the project cost only until the sale, so it is no longer the right target.
6. Accounts Receivable and Wages Payable record the customer billing and the labor owed, neither of which is affected by an overhead estimate.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 2.3.1 Comprehensive Example of Job Order Costing Transactions for a Service Company_
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