Multiple Choice
Which of the following correctly summarizes the steps in the closing process?
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3. Accrual Accounting Concepts
Closing Entries
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Underapplied or overapplied manufacturing overhead can be disposed of by closing it to which of the following accounts?
A
Raw Materials Inventory
B
Work in Process Inventory
C
Sales Revenue
D
Cost of Goods Sold
Verified step by step guidance1
Understand the concept of manufacturing overhead: Manufacturing overhead refers to indirect costs incurred during production, such as factory rent, utilities, and equipment depreciation. These costs are applied to products based on a predetermined rate.
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.
Identify the accounts involved: Manufacturing overhead is typically applied to production costs and impacts accounts such as Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold.
Determine the disposal method: Underapplied or overapplied overhead is usually closed to the Cost of Goods Sold account because this account reflects the total cost of goods sold during the period, including adjustments for overhead variances.
Understand the rationale: Closing the overhead variance to Cost of Goods Sold ensures that the financial statements accurately reflect the true cost of production and sales for the period.
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