Question

Explain what should be done with over-applied or under-applied manufacturing overhead at the end of the year if the amount is considered material

Answer 1

Material over-applied or under-applied manufacturing overhead at year-end should be adjusted through prorating between accounts, allotting to cost of goods sold, or correcting in the next period, according to the significance of the amount.

Step-by-step explanation:

When the amount of over-applied or under-applied manufacturing overhead is considered material at the end of the fiscal year, businesses must adjust their accounts to reflect the actual overhead incurred. There are several methods to deal with this situation:

1. Prorate the difference among cost of goods sold, work in process inventory, and finished goods inventory based on their relative balances.
2. Allocate the entire amount to cost of goods sold if it represents the vast bulk of the overhead applied.
3. Adjust it through the next period as an adjustment if it is not significant enough to merit immediate correction.

The chosen method must reflect the actual overhead costs as accurately as possible and align with the company's financial reporting standards.