Question

At the current year-end, Ruiz Company found that its overhead was underapplied by $2,500, and this amount was not considered material. Based on this information, Ruiz should:

Answer 1

Answer:

Close the $2,500 to Cost of Goods Sold.

Explanation:

Underapplied Overhead bis the portion of actual factory overhead cost that was not allocated to units of production. Since overhead cost do not contribute directly to production they need to be allocated to units produced. For example rent paid is $300 and goods produced was 50. The allocated amount per unit produced will be 300/50= $6 per unit.

When overhead is underapplied there is descrepancy between the standard amount allocated and the actual overhead cost. In this case a sum of $2,500.

To remedy this we need to close the $2,500 to Cost of Goods Sold.