This video shows how to close overapplied or underapplied manufacturing overhead to Cost of Goods Sold.

Manufacturers apply overhead using a predetermined overhead rate, but the manufacturing overhead applied often differs from the actual overhead incurred. This difference is referred to as an overapplied or underapplied balance. Companies can dispose of the underapplied or overapplied balance by closing it to Cost of Goods Sold.

For example, if the company had an underapplied balance of $1,700 (meaning the company didn’t apply enough overhead) it could debit Cost of Goods Sold for $1,700 and credit Manufacturing Overhead for $1,700. Conversely, if the company had an overapplied balance of $1,700 (meaning the company applied too much overhead) it could debit Manufacturing Overhead for $1,700 and credit Cost of Goods Sold for $1,700.