Final answer:
The correct journal entry when the overhead is undersupplied by $12,000 and is immaterial would be Option 1: Debit Cost of Goods Sold, Credit Manufacturing Overhead. This accounts for the underallocated overhead by increasing the cost of goods sold, reflecting the true cost of production. Spreading the overhead refers to allocating the fixed overhead cost across the units produced, which decreases the average fixed cost per unit as production volume increases.
This correct answer is option 1.
Step-by-step explanation:
If overhead is undersupplied and considered immaterial, meaning that its size is too small to significantly affect financial decision-making, the typical journal entry would adjust the current period's income or expense.
When overhead is undersupplied by $12,000, it means that there were not enough overhead costs allocated to the cost of goods sold or to the individual jobs. Hence, the overhead costs that were incurred but not allocated must be accounted for.
The correct entry in this case would be Option 1: Debit Cost of Goods Sold, Credit Manufacturing Overhead. This entry increases the expense recognized in the income statement, thereby reducing net income by the amount of the undersupplied overhead, making the financial statements reflect the actual cost of producing the goods.
It's important to make such adjustments because accurate expense allocation ensures that the cost of goods sold reflects the true cost of production, leading to more accurate profit margins and financial analysis.
Spreading the overhead means to allocate the fixed cost of overhead across units produced. This is essential for determining the average fixed cost, which is calculated by dividing the total fixed cost by the quantity of output produced.
The average fixed cost curve typically decreases as production increases since the same amount of fixed cost is spread over more units, thereby reducing the cost per unit.
This correct answer is option 1.