Question

UNDER vs. OVER APPLIED OVERHEAD

What is under applied overhead? Over applied overhead?   What is the disposition of these amounts at the end of the accounting period?

Answer 1

Under vs Over Applied Overhead:

Budgeted overheads are those estimated before the manufacturing based on budgeted output.

Under Standard costing, Overheads for the period are estimated at the actual output whether it may be Fixed or Variable overheads.

Applied are those estimated at acutal output and are credited to Manufacturing overhead account.

Actual overheads incurred are debitd to to Manufacturing overhead account.

It is very obvious that Overheads estimated will not be the same as incurred in the due course of production.

There's always a difference between applied and actual overhead incurred.

Under applied overhead => Applied overhead is less than the actual overhead incurred & there is DEBIT BALANCE in Manufacturing overhead which means not enough overhead was applied to individual jobs.

Over applied overhead =>   Applied overhead is more than the actual overhead incurred & there is CREDIT BALANCE in Manufacturing overhead which means more than enough overhead was applied to individual jobs.

Example: Case 1

Overhead applied = $ 50,000, Actual overhead incurred = $ 60,000

Here, overhead is underapplied since the applied is less than actual by $ 10,000.

Case 2

Overhead applied = $ 50,000, Actual overhead incurred = $ 40,000

Here, overhead is overapplied since the applied is more than actual by $ 10,000.

Disposition of these amount at the end of reporting period:

Difference between Actual and applied overhead will be adjusted as below

Underapplied overheads are debited to Manufacturing Overhead account with the following journal entry

Cost of goods sold Diff Amt

To Manufacturing Overhead   Diff Amt

Overapplied overheads are credited to Manufacturing Overhead account with the following journal entry

Manufacturing Overhead Diff Amt

To Cost of goods sold      Diff Amt