Final answer:
When manufacturing overhead is overallocated and not significant, the Cost of Goods Sold account is adjusted. This proper adjustment aligns company expenses and production costs more accurately with the financial reports.
Step-by-step explanation:
When a company determines that the amount of manufacturing overhead is overallocated and it is not material, the Cost of Goods Sold account is commonly adjusted at the end of the period. This means that if the company allocated more overhead to products than what was actually incurred, it will decrease the Cost of Goods Sold to reconcile this overallocation. This adjustment ensures that the financial statements reflect a more accurate representation of the company's actual expenses and cost of production.
To illustrate with a numerical example, imagine a company with sales revenue of $1 million, having spent $600,000 on labor, $150,000 on capital, and $200,000 on materials. The firm's accounting profit can be calculated by taking the sales revenue ($1 million) and subtracting the total expenses of labor, capital, and materials ($600,000 + $150,000 + $200,000 = $950,000). The calculation would result in an accounting profit of $50,000 ($1,000,000 - $950,000).