An underallocation of manufacturing overhead is typically corrected by decreasing Cost of Goods Sold on the income statement.

Question

Quizplus · Accepted Answer

An underallocation of manufacturing overhead occurs when the actual manufacturing overhead costs incurred are more than the overhead costs allocated to the production units. This results in an overstatement of the Cost of Goods Sold and understatement of the gross margin. To correct this, the overhead costs need to be adjusted, usually by increasing Cost of Goods Sold or decreasing the gross margin.

An Underallocation of Manufacturing Overhead Is Typically Corrected by Decreasing