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When predetermined rates are used, overhead is applied at the end of the period or at completion of production, whichever is earlier. Overhead is applied at the end of each period so that the Work in Process Inventory account contains costs for all three product elements (direct material, direct labor, and overhead).
More commonly, overhead is applied to jobs using one or more annualized predetermined overhead application rates. Overhead is assigned to jobs by multiplying he predetermined rate by the actual measure of the activity base that was incurred during the period for each job. This method is normal costing.
Overhead is applied to Work in Process Inventory at completion so that a proper product cost can be transferred to Finished Goods Inventory. The journal entry to apply overhead follows.
Work in Process Inventory XXX
Manufacturing Overhead XXX
