What is an alternative way to eliminate overapplied or underapplied manufacturing overhead?

Allocating overapplied or underapplied manufacturing overhead to work-in-process inventory, finished goods inventory, and cost of goods sold on the basis of ending balances in these accounts is a method that ensures a more accurate reflection of manufacturing costs throughout the production process. By distributing the overhead based on the balances in these accounts, the allocation takes into account the actual utilization of resources and how they are reflected in the financial statements.

This approach provides a comprehensive adjustment as it spreads the overapplied or underapplied overhead across all relevant areas where it impacts costs. This balanced method allows for more precise cost control and reporting, aligning with the principles of managerial accounting where accuracy in cost information is crucial for decision-making.

In contrast, allocating to finished goods inventory only, work-in-process inventory only, or manufacturing overhead payable limits the impact of the adjustment and does not reflect the true costs incurred in production. Each of these other approaches could lead to distortions in the cost of goods sold or the valuation of inventory, making them less effective for overall financial reporting and analysis.