Explain why the Factory Overhead Balance must be disposed of at year end?

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Expert Solution

Solution:

Step:1

Over and under applied manufacturing or factory overheads: These overheads incurred when the difference occurs between the factory overheads applied and the actual cost incurred in production.

When applied cost is greater than the actual cost, this is the situation of "over- applied factory overheads". whereas if the actual cost is greaterthan the applied cost, this means "under applied factory overheads".

These situations are normal in the business as these costs applied as per predetermined overhead rates. Hence, can lead to the difference.

Step:2

Dispose of factoryoverheads at the end of the year in two ways:-

1.factory overheads balance can be allocated in accounts like work- in -progress and finished goods.

2.Transferred the whole amount in the cost of goods sold(COGS)

Reason:-

The reason for disposing of factory overheads is that these overheads are related to the current year operating expenses. Therefore, can not be transferred to the next year. Hence,it needs to be either transferred to the cost of goods sold (COGS) account or allocated to the above accounts.

ekkarill92 answered 1 year ago

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