ECONOMICS

Detailed explanation-1: -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-2: -If overhead is overapplied, more overhead has been applied to inventory than has actually been incurred. Enough overhead must be removed retroactively from Cost of Goods Sold (and perhaps ending inventories) to eliminate this discrepancy. Since Cost of Goods Sold is decreased, overapplied overhead increases net income.

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: -If overhead is overapplied, it means hat the credit is bigger than the sum of the debits, so the balance (that must be zeroed in the adjusting entry), is a CREDIT. The adjusting entry at the end of the year will show a debit to the Factory Overhead account and a credit to the Cost of Goods Sold account.