Underapplied overhead is adjusted on the schedule of cost of goods sold. Underapplied overhead suggests that not enough overhead was allocated to tasks during the time period, which led to an underestimation of COGS. COGS is reduced for overapplied.
The two inventories are increased by the adjustment for underapplied overhead, while the two inventories are decreased by the adjustment for overapplied overhead (and the two inventories).
On a company's balance sheet, unapplied overhead is typically shown as a prepaid expense that is balanced by adding a debit to the cost of goods sold (COGS) section by the end of the year. The direct expenses incurred during the production of the products a business sells are known as costs of goods sold.
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