For a manufacturer, it is a type of control account that tracks and control the indirect manufacturing costs (overhead costs) incurred in the production process. This account is used to record all the actual overhead costs incurred (on its debit side) and the overhead applied to the production process (on its credit side). The balance of the account after these transactions are carried out and effected is known as the underapplied or overapplied manufacturing overhead. The balance is adjusted at the end of the accounting period to reflect changes in overhead costs during the period.
The balance in this account captures the difference between the actual overhead cost and the applied overhead costs, and this difference is adjusted against the cost of goods sold (COGS) expense account. The COGS account can be either debited or credited, depending on the balance (whether the overhead was under or overapplied).
It is also known as a factory overhead control account, a manufacturing overhead control account or a factory overhead control ledger.
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