If overhead is underapplied, which of the following statements is FALSE?

• A. Underapplied overhead indicates that not enough overhead was allocated to products.
• B. Actual overhead costs incurred are less than the overhead applied to production.
• C. The Manufacturing Overhead account will have a debit balance.
• D. Cost of Goods Sold may need to be increased to adjust for underapplied overhead.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of underapplied overhead. Underapplied overhead occurs when the actual overhead costs incurred are greater than the overhead applied to production. This means that the company did not allocate enough overhead to its products during the accounting period.
2. Step 2: Analyze the statements provided in the problem. The goal is to identify which statement is FALSE based on the definition and characteristics of underapplied overhead.
3. Step 3: Evaluate the first statement: 'Underapplied overhead indicates that not enough overhead was allocated to products.' This statement is TRUE because underapplied overhead means the applied overhead is less than the actual overhead incurred.
4. Step 4: Evaluate the second statement: 'Actual overhead costs incurred are less than the overhead applied to production.' This statement is FALSE because underapplied overhead occurs when actual overhead costs are greater than the applied overhead, not less.
5. Step 5: Evaluate the remaining statements: 'The Manufacturing Overhead account will have a debit balance' and 'Cost of Goods Sold may need to be increased to adjust for underapplied overhead.' Both of these statements are TRUE because underapplied overhead results in a debit balance in the Manufacturing Overhead account, and the Cost of Goods Sold may need to be adjusted upward to account for the underapplied amount.