Question

How would you recommend closing out the over- or under-applied overhead?

Answer 1

Overhead has two terms :

Applied overhead & actual overhead

If applied overhead is higher than actual overhead then its called over applied overhead.

But when applied overhead is lower than actual overhead then its called under applied overhead.

After find out over or under applied overhead we should closing out over or under applied overhead.

Generally, over or under applied overhead should be closing out in cost of goods sold account. but sometimes question specifically demands in the ratio of raw material inventory, work in process inventory, and finished goods inventory.