Underapplied (actual is more than applied) or over¬ applied (actual is less than applied) overhead is

• caused by a difference between budgeted and actual overhead costs and/or a difference be¬ tween budgeted and actual level of activity cho¬ sen to compute the predetermined overhead rate.

• closed at the end of each period (unless nonmal capacity is used for the denominator level of ac¬ tivity) to Cost of Goods Sold (CGS) if the amount of underapplied or overapplied overhead is im¬ material (underapplied will cause CGS to in¬ crease and overapplied will cause CGS to decrease)

or

>- Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold (based on their proportional balances) if the amount of underapplied or overapplied overhead is material.

LO.1