Question

At the end of the year, overhead applied was $3,669,000. Actual overhead was $3,202,000. Closing over/underapplied overhead into Cost of Goods Sold would cause net income to

a.increase by $467,000

b.decrease by $467,000

c.increase by $934,000

d.decrease by $934,000

Answer 1

Ans A increase by $467000

Reason is explanation as follows

Underapplied overhead:

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.

Overapplied 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.

hence given case is over applied over head since applied overheads are more than actual over heads ($3669-$3202)by $467000, in case of over applied over head , cost of goods sold will decrease .

When the cost of goods sold decreases, net income is increased because there is more profit from the sale of the product. Critics of this accounting method of dealing with underapplied manufacturing overhead say it should be recorded on the income statement under cost of unused capacity to make it less complicated to see.