The appropriate method of diposition of underapplied or overapplied overhead of a manufacturer?

The right answer Is # C- Depends on the significant of the amount

C- Depends on the significant of the amount

C is the perfect answer in this regard because disposition of under applied or over applied overhead of manufacturing stage definitely  involves in all kinds inventory i.e. work in process as well as Finished goods which are part of Cost of Goods of Sold

C. depends on the significance of the amount involved.

If the amount is immaterial, it is closed to Cost of Goods Sold.

If the amount is significant, it should be allocated among the accounts containing applied overhead: Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold.

The Over or Under Applied manufacturing Overhead is difference between Manufacturing Cost applied to work in progress & manufacturing overhead actually incurred.

Over applied Manufacturing overhead When,Applied Overhead>actual Overhead

Under Applied Manufacturing Overhead When,Applied Overhead<actual Overhead

It can be disposed by two method

1.When the the amount of Over/Under Absorbed over head in immaterial then the entire amount is 

Under  Applied

Cost of goods sold Dr

  Manufacturing Over head 

Over Applied

Manufacturing Overhead Dr

   Cost of goods sold

2.if the value of Over/Under applied over head is material than it is allocated proportionately to Finished Goods,WIP & Cost of goods sold

Under  Applied

Cost of goods sold Dr

WIP                           Dr

Finished goods      Dr

  Manufacturing Over head 

Over  Applied

Manufacturing Over head  Dr

         Cost of goods sold 

         WIP                           

          Finished goods  

Regards

Ajay

FC

Alpha Oman LLC