If the amount of underapplied or overapplied overhead is considered material at the end of a period, the preferred approach to dispose of such balances is to allocate the amounts proportionally to Cost of Goods Sold for the period and ending Work in Process and Finished Goods inventories.

Question

Quizplus · Accepted Answer

This is a common and accepted approach to dispose of underapplied or overapplied overhead when the balance is considered material. By allocating the amounts proportionally to Cost of Goods Sold and ending inventory balances, the impact of the under or over allocation can be spread out and absorbed by the affected accounts.

If the Amount of Underapplied or Overapplied Overhead Is Considered