ECONOMICS

COST ACCOUNTING

MANUFACTURING OVERHEAD

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
After posting all actual factory overhead and applying factory overhead to production departments in a process costing system,
A
There will never be over-applied overhead.
B
There will always be under-applied overhead.
C
There may be over or under-applied overhead
D
There will always be over-applied overhead.
Explanation: 

Detailed explanation-1: -There may be over or underapplied. After posting all actual factory overhead and applying factory overhead to production departments in a process costing system, A. There will never be underapplied overhead.

Detailed explanation-2: -When overhead has been overapplied, the proper accounting is to debit the manufacturing overhead cost pool and credit the cost of goods sold in the amount of the overapplication. Doing so results in the actual amount of overhead incurred being charged through the cost of goods sold.

Detailed explanation-3: -Put simply, the business went over budget making the cost of goods sold more than expected. As noted above, underapplied overhead is reported on a company’s balance sheet as a prepaid expense or a short-term asset. This debit item on the balance sheet must be offset at a future date.

Detailed explanation-4: -Overapplied overhead. Factory overhead applied is in excess of Actual overheads which means, the allocated overhead is more than the actual overhead. And, when the difference between the allocated and actual overhead when allocated overhead is more, it is called overapplied overhead. So, the correct answer is option c.

Detailed explanation-5: -In process costing, factory overhead and direct labor costs are debited to the Work-in-Process Inventory account of each production department.

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