Question

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

Select one:

A. 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.

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

C. 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.

D. 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.

E. It is not normal for a company to have under- or over-applied overhead, because overhead is allocated based on actual costs incurred.

Answer 1

Option A is the answer

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.

Overhead is considered over applied when the amount allocated as overhead is higher than actually incurred. It's under applied when the allocated is lower than actual. However when there's significant amount of over or under applied overhead, it should be allocated to wip, finished goods and cogs proportionally