ECONOMICS

Detailed explanation-1: -Once the products are sold, the cost of goods sold increases. Underapplied manufacturing overhead results when the actual overhead exceeds the overhead applied to the job.

Detailed explanation-2: -In order to determine whether overhead was over or under applied for the period, the company’s cost account balances the manufacturing overhead account. If credits exceed debits, then overhead was over applied, if debits exceed credits than overhead was under applied.

Detailed explanation-3: -For example if a company calculates its predetermined overhead rate $6 per machine hour. 15, 000 machine hours are actually worked and overhead applied to production is therefore $90, 000 (15, 000 hours × $6). If actual factory overhead is $95, 000 then underapplied overhead is $5, 000 ($95, 000 – $90, 000).

Detailed explanation-4: -The adjustment made for overhead that is over-applied is that the extra amount that is charged to COGS will be reduced by making an adjustment entry.