At the current year-end, Hardly Company found that its overhead was underapplied by $2,500, and this amount was not deemed to be a material amount. Based on this information, Hardly should
A) Close the $2,500 to Cost of Goods Sold.
B) Close the $2,500 to Finished Goods Inventory.
C) Do nothing about the $2,500, since it is not material, and it is likely that overhead will be overapplied by the same amount next year.
D) Carry the $2,500 to the income statement as "Other Expense".
E) Carry the $2,500 to the next period.

Question

Quizplus · Accepted Answer

When overhead is underapplied, it means that actual overhead is greater than applied overhead. This would result in an increase in cost of goods sold. Therefore, the $2,500 should be closed to Cost of Goods Sold. Additionally, the fact that the amount is not material means that it is not significant enough to carry forward to the next period or record as an "Other Expense."

At the Current Year-End, Hardly Company Found That Its Overhead