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The most common accounting treatment for underapplied or overapplied manufacturing overhead is to close it out to cost of goods sold. This reflects the fact that the actual cost to produce the goods sold was higher or lower than anticipated.
In financial statements these are generally disclosed in the following manner:
Cost of goods sold, normal
Add: Underapplied overheads (In case of underapplied)
Less: Overapplied overheads (In case of overapplied)
Cost of goods sold, actual
Add or less from cost of goods sold
In the income statement, under the Cost Of Goods Sold (COGS) breakdown.
adjust cost of goods sold...................................
