Answer:
Underallocated manufacturing overhead results when the actual manufacturing overhead costs incurred during a period are greater than the manufacturing overhead costs allocated to production during that same period.
Step-by-step explanation:
Manufacturing overhead costs include indirect costs such as rent, utilities, depreciation, and maintenance, which cannot be directly traced to a specific product. These costs are allocated to the products based on a predetermined overhead rate, which is calculated by dividing the estimated total manufacturing overhead costs for a period by the estimated total amount of allocation base (such as direct labor hours or machine hours) for that same period.
If the actual manufacturing overhead costs incurred during a period are greater than the manufacturing overhead costs allocated to production during that same period, then there is underallocation of manufacturing overhead. This means that some of the manufacturing overhead costs have not been allocated to the products, resulting in an understatement of the cost of goods sold and an overstatement of the gross profit for that period. To correct for underallocated manufacturing overhead, the manufacturing overhead account is increased and the cost of goods sold account is decreased by the amount of the underallocation.