Final answer:
Over-applied or under-applied manufacturing overhead can be adjusted through prorating at the end of the year if the amount is not considered material.
Step-by-step explanation:
In accounting, over-applied or under-applied manufacturing overhead occurs when the actual manufacturing overhead costs incurred differ from the amount that was allocated or applied to production.
If the amount is not considered material, it can be adjusted at the end of the year through a process called prorating.
For example, let's say a company allocated $100,000 of manufacturing overhead to its production but only incurred $95,000 of actual overhead costs.
In this case, the $5,000 difference can be prorated and allocated to the cost of goods sold, finished goods inventory, and work in progress inventory.
This adjustment ensures that the costs are properly allocated and reflected in the financial statements, providing a more accurate picture of the company's financial performance.