Question

Which of the following correctly explains what should be done with any under- or over-applied overhead?

Monthly, any significant amount of under- or over-applied overhead should be closed to Cost of Goods Sold.

At year end, if there is a significant amount of under- or over-applied overhead, it should all be closed to Cost of Goods Sold.

At the end of a project, any insignificant under- or over-applied overhead should be closed to Work in Process prior to transferring the costs to Finished Goods.

At year end, if there is a significant amount of under- or over-applied overhead, it should be allocated proportionally to Work in Process, Finished Goods, and Cost of Goods sold.

Answer 1

The correct answer is option D i.e At year end, if there is a significant amount of under- or over-applied overhead, it should be allocated proportionally to Work in Process, Finished Goods, and Cost of Goods sold.

This is the best way to allocate under or over applied overhead since if otherwise it is directly attributed to Cost of goods sold than under or over applied overhead will only be allocated to the goods sold but Overhead are incurred for all goods produced, goods which are still in process and also goods sold therefore the beast way to allocate under or over applied overhead is to be allocated proportionally to Work in Process, Finished Goods, and Cost of Goods sold.