Final answer:
When manufacturing overhead is underapplied, the adjusting entry involves debiting Cost of Goods Sold and crediting Manufacturing Overhead, to align the reported expenses with the actual costs incurred during the year.
Step-by-step explanation:
If manufacturing overhead has been underapplied during the year, the adjusting entry at the end of the year will show a debit to Cost of Goods Sold and a credit to Manufacturing Overhead.
This entry is necessary to correct the expense on the income statement so that it accurately reflects the total cost of goods manufactured and sold during the period.
To determine the amount of the underapplied overhead, you would take the difference between the overhead costs that were actually incurred and the overhead costs that were applied to products based on the company's predetermined overhead rate.
This is done to increase the COGS and decrease the underapplied manufacturing overhead in order to correct the discrepancy between the estimated and actual overhead costs. The adjusting entry ensures that the balance sheet and income statement are accurately reflecting the true costs of manufacturing.