Which of the following best describes the adjusting entry for underapplied overhead at the end of an accounting period?

• A. Debit Manufacturing Overhead and credit Cost of Goods Sold
• B. Debit Manufacturing Overhead and credit Raw Materials Inventory
• C. Debit Cost of Goods Sold and credit Manufacturing Overhead
• D. Debit Work in Process and credit Manufacturing Overhead

Answer: (C)

Verified step by step guidance

1. Understand the concept of underapplied overhead: Underapplied overhead occurs when the actual overhead costs incurred during a period exceed the overhead costs applied to production. This needs to be adjusted to ensure accurate financial reporting.
2. Identify the accounts involved: The adjustment for underapplied overhead typically involves the Manufacturing Overhead account and the Cost of Goods Sold account. Manufacturing Overhead is credited to reduce its balance, and Cost of Goods Sold is debited to increase its balance.
3. Determine the purpose of the adjusting entry: The goal is to allocate the underapplied overhead to the Cost of Goods Sold, as this reflects the actual cost incurred during the period and ensures the financial statements are accurate.
4. Formulate the journal entry: The adjusting entry for underapplied overhead is structured as follows: Debit Cost of Goods Sold (to increase the expense) and Credit Manufacturing Overhead (to reduce the overhead account balance).
5. Review the options provided: Compare the options given in the problem to the correct journal entry structure. The correct answer is 'Debit Cost of Goods Sold and credit Manufacturing Overhead,' as this properly adjusts for underapplied overhead.