RECONCILIATION OF OVERHEAD COSTS

To prepare financial statements at the end of the accounting period, the Cost of Goods Sold account must reflect actual product costs, including actual overhead.Thus, the Overhead account must be reconciled every period. Under applied overhead: As you learned in a previous chapter, if at the end of the accounting period the actual overhead debit balance exceeds the applied overhead credit balance, then the Overhead account is said to be under applied and the debit balance must be closed to the Cost of Goods Sold account. Here is the entry in journal form:
                                                        Dr.          Cr.
Cost of Goods Sold                      XX
             Overhead                                       XX

Over applied overhead: If the actual overhead cost for the period is less than the estimated overhead that was applied during the period, then the Overhead account is over applied and the credit balance must be closed to the Cost of Goods Sold account. Here is the entry in journal form:
                                                  Dr.         Cr.
Overhead                                XX
     Cost of Goods Sold                          XX