Final answer:
To deal with overallocated or underallocated manufacturing overhead, businesses must adjust their financials to reflect the true operational costs, affecting decisions on production, pricing, and resource management.
Step-by-step explanation:
When addressing overallocated or underallocated manufacturing overhead, companies must make adjustments to ensure financial statements are accurate. To rectify overallocation, the actual overhead costs were less than what was allocated, indicating that expenses were overestimated. The company should decrease costs in the cost of goods sold (COGS) and adjust income upwards. Conversely, underallocation occurs when actual overhead is more than what was allocated, pointing out that costs were underestimated. This requires the company to increase expenses in the COGS and decrease income. These adjustments align reported operational costs with the actual cost, maintaining the integrity of financial reporting.
Businesses must continually make decisions to expand or reduce production, set the price they choose, open new factories or sales facilities or close them, hire workers or lay them off, and start selling new products or stop selling existing ones. These decisions are guided by the allocation of overhead and the resultant analysis of overallocation or underallocation, influencing resource management and strategic planning. Additionally, the concept of division and specialization of labor, as described by Adam Smith, highlights the importance of efficient production methods and the trade-offs made in resource allocation decisions.