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Impact on decision making and financial statements: "When overheads are Over-applied the cost of goods sold...

Impact on decision making and financial statements:

"When overheads are Over-applied the cost of goods sold will be higher and work in process inventory and finished goods inventory will be at higher cost in financial statements"

Can you please explain why?

Business   Accounting   
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Answer #1

Solution:

Overhead Cost: Overheads applied on the production is on the basis of predetermined rate. This rate is depend on the Labour hours, Machine Hours or some other method as suitable to industry.

These rates are charged as manufacturing expenses and if the overheads are over applied than total cost of manufacturing is at higher sit and costing of product will be show at high cost. When manufacturing cost is high than work in process inventory is also at higher site.

All manufacturing expenses are transferred to finished goods department. So if the manufacturing cost is at higher price than finished goods and finished goods inventory is also high.

Conclusion:

Overhead expenses is charged as production cost and if production cost is increased due to over applied of overhead than work in process inventory and finished goods inventory will be at higher cost in financial statements.

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