By y dollars what do we do with the balance in the

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by Y dollars. What do we do with the balance in the Manufacturing Overhead account at the end of the accounting period? The underapplied or overapplied balance remaining in the Manufacturing Overhead account at the end of a period is treated in one of two ways: 1. Closed out to Cost of Goods Sold. 2. Allocated among the Work in Process, Finished Goods, and Cost of Goods Sold accounts in proportion to the overhead applied during the current period in ending balances. Closed Out to Cost of Goods Sold Closing out the balance in Manufacturing Overhead to Cost of Goods Sold is simpler than the allocation method. Returning to the example of Ruger Corporation , the entry to close the $5,000 of underapplied overhead to Cost of Goods Sold is: p. 111
9/11/09 7:22 PM McGraw-Hill's Connect - Ebook Page 4 of 6 Note that because the Manufacturing Overhead account has a debit balance, Manufacturing Overhead must be credited to close out the account. This has the effect of increasing Cost of Goods Sold for April to $123,500: After this adjustment has been made, Ruger Corporation 's income statement for April will appear as shown earlier in Exhibit 3-12 . Note that this adjustment makes sense. The unadjusted cost of goods sold is based on the amount of manufacturing overhead applied to jobs, not the manufacturing overhead costs actually incurred. Because overhead was underapplied, not enough cost was applied to jobs. Hence, the cost of goods sold was understated. Adding the underapplied overhead to the cost of goods sold corrects this understatement. Allocated between Accounts Allocation of underapplied or overapplied overhead between Work in Process, Finished Goods, and Cost of Goods Sold is more accurate than closing the entire balance into Cost of Goods Sold. This allocation assigns overhead costs to where they would have gone in the first place had it not been for the errors in estimating the predetermined overhead rate. Had Ruger Corporation chosen to allocate the underapplied overhead among the inventory accounts and Cost of Goods Sold, it would first be necessary to determine the amount of overhead that had been applied during April to each of the accounts. The computations would have been as follows: Based on the above percentages, the underapplied overhead (i.e., the debit balance in Manufacturing Overhead) would be allocated as shown in the following journal entry: Note that the first step in the allocation process was to determine the amount of overhead applied in each of the accounts. For Finished Goods, for example, the total amount of overhead applied to Job A, $60,000, was divided by the total number of units in Job A, 1,000 units, to arrive at the average overhead

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