Final answer:
If manufacturing overhead is underapplied, it means that the actual overhead costs incurred in production are greater than the amount allocated or applied to the products. This requires adjusting the cost of goods sold and the ending inventory to reflect the actual overhead costs incurred.
Step-by-step explanation:
If manufacturing overhead is underapplied, it means that the actual overhead costs incurred in production are greater than the amount allocated or applied to the products. This can happen if the estimated overhead rate used to allocate costs is too low. As a result, the cost of production is understated and the total cost of the products is also understated.
When manufacturing overhead is underapplied, it is necessary to adjust the cost of goods sold and the ending inventory to reflect the actual overhead costs incurred. This is done by increasing the cost of goods sold and decreasing the ending inventory by the amount of the underapplied overhead.
For example, if the estimated manufacturing overhead is $10,000 and the actual manufacturing overhead incurred is $12,000, there is an underapplied overhead of $2,000. To adjust for this underapplied overhead, the cost of goods sold would be increased by $2,000 and the ending inventory would be decreased by $2,000.