What typically happens at the end of an accounting period when there is unallocated manufacturing overhead?

At the end of an accounting period, any unallocated manufacturing overhead typically gets allocated to cost of goods sold or retained earnings. This allocation is essential because it ensures that all manufacturing costs, including overhead, are properly matched with the revenues they helped generate during the period.

When manufacturing overhead is unallocated, it means that not all of the overhead costs have been assigned to the products manufactured during that period. To achieve an accurate representation of the cost of goods sold, companies will allocate any remaining overhead costs proportionally to the cost of goods sold. This process helps in maintaining consistency with the matching principle in accounting, which states that expenses must be matched with the revenues they help to generate in the same period.

Additionally, if the unallocated overhead is significant, some companies might choose to transfer it to retained earnings after closing the books, ensuring accurate reporting of equity on the balance sheet. However, the primary action taken is the allocation to cost of goods sold, which directly impacts the profitability of the period by influencing the gross margin reported.

This approach not only presents a more accurate picture of the costs incurred during the period but also aligns financial statements with accounting principles that emphasize the need for precise reporting of expenses in relation to revenues.