Question

If a company has underapplied overhead, then the journal entry to dispose of it could possibly include:

Answer 1

Explanation:

When a company has underapplied overhead, it means that the actual overhead costs incurred during a period exceeded the overhead costs allocated or applied to the company's products or operations. To correct for underapplied overhead, a journal entry is typically made to adjust the accounts and bring them in line with the actual costs. The journal entry may include the following components:

1. **Debit to Cost of Goods Sold (COGS):** This is the main account affected when there is underapplied overhead. You would debit COGS to increase the expense, reflecting the additional overhead costs incurred during the period.

2. **Credit to Manufacturing Overhead:** The credit is made to the manufacturing overhead account to reduce the applied overhead costs. This is necessary to reflect the fact that the applied overhead was less than the actual overhead costs.

3. **Optional: Allocate or prorate the adjustment:** Depending on the company's accounting policy, you may allocate or prorate the underapplied overhead adjustment among various cost centers, jobs, or products, if applicable. This would involve additional debits and credits to specific accounts.

Here's an example of a journal entry to dispose of underapplied overhead:

**Journal Entry:**

```

Date: [Date of the Entry]

1. Debit: Cost of Goods Sold (COGS) [To increase the expense]

Credit: Manufacturing Overhead [To reduce the applied overhead]

2. [Optional] Debit or Credit other relevant accounts for allocation or proration.

[Explanation: This entry adjusts COGS to account for the additional overhead costs incurred during the period and reduces the applied overhead to match the actual costs. Any allocation or proration is done as necessary to distribute the adjustment accurately among cost centers, jobs, or products.]

[Additional Explanations or References, if needed]

```

The specific accounts and amounts involved in the journal entry can vary depending on the company's accounting practices and the nature of the underapplied overhead. It's essential to follow generally accepted accounting principles (GAAP) and consult with an accountant or financial professional to ensure proper handling of underapplied overhead in your company's financial records.

Answer 2

When a company has underapplied overhead (meaning that the actual overhead costs exceeded the applied overhead costs), it needs to adjust its books to account for this difference. To dispose of underapplied overhead, the journal entry typically includes:

1. **Debit to Cost of Goods Sold (COGS):** Underapplied overhead represents an additional cost that was not initially allocated to products. To reflect this cost in the income statement, you debit COGS. This increases the cost of goods sold and reduces the company's net income.

2. **Credit to Manufacturing Overhead:** Since the applied overhead was lower than the actual overhead, you credit the Manufacturing Overhead account to reduce it by the amount of the underapplied overhead. This adjustment helps reconcile the actual overhead costs with the applied overhead.

The specific journal entry may vary based on the company's accounting practices and the magnitude of underapplied overhead. It's essential to consult with an accountant or follow your company's accounting policies when making this adjustment.