Underapplied or overapplied manufacturing overhead can be disposed of by closing it to ______.

• A. Sales Revenue
• B. Work in Process Inventory
• C. Raw Materials Inventory
• D. Cost of Goods Sold

Answer: (D)

Verified step by step guidance

1. Understand the concept of manufacturing overhead: Manufacturing overhead includes all indirect costs associated with production, such as factory utilities, depreciation on equipment, and salaries of supervisors. These costs are applied to products based on a predetermined overhead rate.
2. Recognize the terms underapplied and overapplied overhead: Underapplied overhead occurs when the actual overhead costs exceed the applied overhead costs. Overapplied overhead occurs when the applied overhead costs exceed the actual overhead costs.
3. Determine the disposal method for underapplied or overapplied overhead: The most common method is to close the balance to the Cost of Goods Sold account, as this account reflects the total cost of producing goods sold during the period.
4. Understand why Cost of Goods Sold is used: Closing the underapplied or overapplied overhead to Cost of Goods Sold ensures that the financial statements accurately reflect the true cost of production, aligning expenses with revenues for the period.
5. Apply the adjustment: If the overhead is underapplied, increase the Cost of Goods Sold account by the amount of the underapplied overhead. If the overhead is overapplied, decrease the Cost of Goods Sold account by the amount of the overapplied overhead.