Final answer:
The under- or overapplied overhead at the end of the year should not be allocated to Raw Materials Inventory.
Step-by-step explanation:
Allocating under- or overapplied overhead is a process used in cost accounting to distribute the difference between actual and applied overhead costs. However, these adjustments should not impact Raw Materials Inventory. Raw materials represent the initial stage of production, and overhead costs are incurred during the manufacturing process. Therefore, any discrepancies in overhead costs at the end of the year should be allocated to Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold, which directly reflect the manufacturing and selling stages.
To elaborate, Work in Process Inventory accounts for the costs associated with goods that are currently in the production process, while Finished Goods Inventory represents the completed products ready for sale. Cost of Goods Sold, on the other hand, accounts for the expenses directly linked to goods sold during the period. These three categories encompass the entire production and selling cycle, making them suitable for absorbing any under- or overapplied overhead. However, Raw Materials Inventory remains outside this cycle and is not affected by manufacturing overhead adjustments.
In summary, the exclusion of Raw Materials Inventory from the allocation of under- or overapplied overhead ensures that adjustments are accurately reflected in the stages of production and sales without affecting the initial raw material costs.