Question

Which of the following statements about under- or overapplied manufacturing overhead is correct?

a. After the entry to transfer over- or under-applied overhead to Cost of Goods Sold is posted, Manufacturing Overhead will have a zero balance.
b. When Manufacturing Overhead has a credit balance, overhead is said to be underapplied.
c. At the end of every month, under- or overapplied overhead is eliminated by a closing entry.
d. When annual financial statements are prepared, overapplied overhead is reported in current liabilities.

Answer 1

The correct statement is a: Manufacturing Overhead will have a zero balance after transferring the over- or under-applied overhead to Cost of Goods Sold. Statements b, c, and d contain inaccuracies regarding the nature of under- or overapplied overhead and its accounting treatment. Therefore, the correct option is A.

Step-by-step explanation:

The correct statement about under- or overapplied manufacturing overhead is: a. After the entry to transfer over- or under-applied overhead to Cost of Goods Sold is posted, Manufacturing Overhead will have a zero balance. This is because such entries are made to ensure that all manufacturing overhead costs applied during a period are fully allocated by the end of that period. If overhead is underapplied, there was not enough overhead allocated to the products, and vice versa for overapplied overhead. If Manufacturing Overhead has a debit balance, overhead is underapplied, meaning statement b is incorrect because it erroneously associates a credit balance with underapplied overhead. Under- or overapplied overhead may be eliminated each month, but companies may also wait until the end of the year, making statement c incorrect in suggesting it is an absolute monthly practice. Lastly, overapplied overhead is typically not reported as a current liability; it is usually adjusted against cost of goods sold or allocated among work-in-process, finished goods, and cost of goods sold, hence, d is incorrect.