At the end of the year, overhead applied was $42,000,000. Actual overhead was $40,300,000. Closing over/underapplied overhead into Cost of Goods Sold would cause net income to increase or decase and by how much?
When there is a debit balance in the manufacturing overhead account during the month end, it indicates that overheads applied to jobs are less than the actual overhead cost incurred by the business. Therefore, the debit balance in the manufacturing overhead account is referred to as underapplied overhead.
When there is a credit balance in the manufacturing overhead account during the month end, indicates that overheads applied to jobs is more than the actual overhead cost incurred by the business. Therefore, the credit balance in the manufacturing overhead account is referred to as overapplied overhead.
Calculate the overapplied or underapplied overhead.
Thus, closing overapplied overhead into cost of goods sold would cause net income to increase by $1,700,000.
Follow Up question:
I agree with Step 1 and Step 2. However, since the overapplied overhead flows to cost of goods sold, net income should decrease by 1,700,000, no?
Suppose revenue was 1 billion, and no tax, other operating expenses. The net income accounting for applied overhead would be 58 million vs. the net income accounting for actual overhead of 59.7 million. Applied overhead > actual overhad; net income should decrease by 1.7 million.
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