Question

If manufacturing overhead was under-allocated during 200X for a given company, then, before the entry to close manufacturing overhead, cost-of-goods sold would be:

		too low
		too high
		neither too high or too low
		undetermined--there is no relationship between the application of manufacturing overhead and Cost-of-Goods-Sold.

Answer 1

If the manufacturing overhead was under-allocate then it means that the it was the case of less recovery of overhead. Actual overhead is more than the applied overhead on inventory. This means that inventory is valued at less which results in too low cost of goods sold.

As per above concept, the correct option will be (a). The cost of goods sold in understated before the adjusting the entry. The Company needs to further debit cost of goods sold A/c and credit Manufacturing overhead. So that overhead can be recovered at year.

Option (b) because too high is in the over absorption of overhead. In that applied overhead is more than applied overhead.

option (c) & (d) are incorrect. It is incorrect to say Little or no co-relation between the same. Under absorption costing, cost of goods sold is totally depended upon overhead recovery rates.