Question

Management Accounting question

Question

i. Describe in your own words how MOH is under-applied and what are the underlying reasons?

ii. Assume a company adjusts its under-applied MOH to cost of goods sold. Explain in your own words why Cost of Goods Sold needs to be increased (debited) when adjusting an under-applied MOH amount?

Answer 1

1.)	MOH will be under-applied , when the actual manufacturing overhead incurred is more than the applied overhead. The reason for the under-applied MOH could be that we have estimated MOH less than the actually incurred or the bases on which prdetermined MOH rate has been calculated has been taken at higher side , than actual activity base.
2.)	In case of Under-applied MOH, there is debit balance lying in MOH account & that need to be adjusted with Cost of goods sold, therefor to close the MOH balance we will debit the cost of goods sold ( increased ) & credit the MOH with under-applied amount of MOH.