ECONOMICS

Detailed explanation-1: -Underapplied overhead occurs when a business doesn’t budget enough for its overhead costs. This means the budgeted amount is less than the amount the business actually spends on its operations.

Detailed explanation-2: -If manufacturing overhead has a debit balance, the overhead is underapplied, and the resulting amount in cost of goods sold is understated. The adjusting entry is: If manufacturing overhead has a credit balance, the overhead is overapplied, and the resulting amount in cost of goods sold is overstated.

Detailed explanation-3: -If manufacturing overhead has a debit balance, the overhead is underapplied, and the resulting amount in cost of goods sold is understated. The adjusting entry is: If manufacturing overhead has a credit balance, the overhead is overapplied, and the resulting amount in cost of goods sold is overstated.

Detailed explanation-4: -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-5: -Underapplied overhead is recorded as a prepaid expense on the balance sheet and then corrected through increasing cost of goods sold at the end of the time period.