![\"overapplied](\"https:\/\/media.cheggcdn.com\/study\/368\/3689e190-6c5d-4ec6-bc4d-32c8b08f3206\/Number5.png\")
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One strategy is to refine the predetermined overhead rate by using more accurate and dynamic allocation bases. For example, activity-based costing (ABC) can provide a more precise method of allocating overhead by linking costs to specific activities and cost drivers. This approach helps in identifying inefficiencies and areas for cost reduction, ultimately leading to more accurate overhead allocation.<\/p>\n
In a sense, the production managers came in \u201cunder budget\u201d and achieved a lower overhead than the cost accountants estimated. In this case, XYZ Corp. will need to make an adjustment to its accounting records to account for the overapplied overhead. This could involve decreasing the cost of goods sold, or adjusting other inventory accounts depending on the company\u2019s accounting policy. This will ensure the company\u2019s financial statements accurately reflect the actual overhead costs incurred during the period.<\/p>\n
These may be explained by expected hiccups in production, business, or seasonal variation. It is useful to note that some companies may use the more accurate method, but more time-consuming, to reconcile the underapplied or overapplied overhead. That method will not only allocate the overhead to the cost of goods sold but also to the work in process inventory account and the finished goods inventory account. Effective management of overapplied overhead requires a combination of proactive planning and continuous monitoring.<\/p>\n
![\"overapplied](\"https:\/\/media.cheggcdn.com\/media\/d3f\/d3fd44c6-a565-47d3-88f7-8e6141f9c6ab\/phpaQIQxa.png\")
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In this book, we assume companies transferoverhead balances to Cost of Goods Sold. We leave the morecomplicated procedure of allocating overhead balances to inventoryaccounts to textbooks on cost accounting. If not adjusted, the overapplied amount can lead to an overstatement of net income. This can have tax implications, as higher reported earnings may result in a larger tax liability. Additionally, it can affect dividend distributions, as companies might distribute more profits than they actually earned, potentially straining cash flows. Since we will be using the concept of thepredetermined overhead rate many times during the semester, letsreview what it means again.<\/p>\n
This will result in an excess charge of $15,000 to the cost of goods sold, if the situation is not corrected. To do so, the company\u2019s controller debits the manufacturing overhead cost pool for $15,000, while crediting the cost of goods sold account for the same amount. The result is a cost of goods sold that incorporates only the actual overhead costs incurred during the month of March.<\/p>\n