Question

A company has OVERAPPLIED overhead for the year. If all other things remain constant, which of the following will give the company the higher net income?

A. Closing the overapplied overhead totally to Cost of Goods Sold

B. Allocating the overapplied overhead to the appropriate accounts

Answer 1

Overhead is overapplied when the overhead has credit balance remaining after they are applied to the jobs. Thus this will be closed by transferring the balance to Cost of Goods sold. So, the entry is:

Manufacturing Overhead Dr	xxx
To Cost of Goods sold		xxx

Thus, by above entry the Cost of Goods sold will come down and thus increase the gross income finally resulting in increase in higher net income.

Hence Option A is correct.

Option B is technically incorrect way to deal with overapplied overhead.