ECONOMICS

Detailed explanation-1: -When overhead is under-applied, the adjustment increases overhead, cost of goods sold, finished goods and work in process. Used when the imbalance in manufacturing overhead is material to the company. The amount is allocated to each account proportionally to the accounts’ ending balances.

Detailed explanation-2: -The adjustment for underapplied overhead increases Cost of Goods Sold (and the two inventories) whereas the adjustment for overapplied overhead decreases Cost of Goods Sold (and the two inventories).

Detailed explanation-3: -Subtract the budgeted overhead costs from the actual overhead costs to determine the applied overhead. In our example, $10, 000 minus $8, 000 equals $2, 000 of underapplied overhead.