Underapplied or overapplied overhead, prepare the necessary journal entry to close the overhead account if the balance is considered immaterial
To determine whether the balance of the underapplied or overapplied overhead is immaterial or not, you can follow these steps:
1. Begin by retrieving the balance of the underapplied or overapplied overhead account from the general ledger or overhead control account.
2. Compare the balance to the total cost of goods sold (COGS) for the accounting period. This can be found on the income statement or in the financial statements.
3. Calculate the percentage of the underapplied or overapplied overhead balance compared to the total COGS. If the percentage is relatively small, typically less than 1-2% of COGS, the balance is considered immaterial.
If the balance is determined to be immaterial, you can then proceed to close the overhead account by making the necessary journal entry. This entry will depend on whether the overhead is underapplied or overapplied.
For underapplied overhead:
Debit: Cost of Goods Sold
Credit: Manufacturing Overhead
For overapplied overhead:
Debit: Manufacturing Overhead
Credit: Cost of Goods Sold
The Cost of Goods Sold account is credited for underapplied overhead to decrease the balance, while Manufacturing Overhead is credited for overapplied overhead to decrease the balance.
Remember to consult with your company's accounting policies and consider seeking assistance from a professional accountant to ensure accuracy and compliance.
If the balance of the overhead account is considered immaterial, it can be closed directly to Cost of Goods Sold (COGS). Here is the step-by-step process to prepare the necessary journal entry:
1. Determine whether the overhead account has an underapplied or overapplied balance. This can be done by comparing the actual overhead incurred with the overhead applied to the production process.
2. If the overhead is underapplied, it means that the actual overhead incurred is greater than the overhead applied. If it is overapplied, it means that the overhead applied is greater than the actual overhead incurred.
3. Calculate the difference between the actual overhead and the overhead applied. This difference represents either the underapplied or overapplied amount.
4. Check whether the underapplied or overapplied amount is considered immaterial. If it is material, you should consult with your accountant or financial manager for further guidance.
5. If the underapplied or overapplied amount is immaterial, it can be closed directly to COGS. The journal entry to close the overhead account would be as follows:
Debit: Overapplied or Underapplied Overhead (whichever is applicable)
Credit: Cost of Goods Sold
6. Enter the calculated underapplied or overapplied amount as the debit or credit, respectively, in the journal entry.
7. Post the journal entry to the general ledger, ensuring that the debits and credits are recorded correctly.
By following these steps, you can prepare the necessary journal entry to close the overhead account when the balance is considered immaterial. Remember to consult with your accountant or financial manager if the underapplied or overapplied amount is material.