Question

Explain the difference between under allocated overhead and over allocated overhead. What causes each situation?

Answer 1

Under and over allocation of overhead occurs because there is difference between applied manufacturing overhead cost to work in process and actually incurred manufacturing overhead cost during a period.

Underallocated or under-applied overhead is the amount of manufacturing overhead allocated to work-in-progress less than the overhead amount actually incurred. Thus it occurs when actual manufacturing overhead costs are more than allocated manufacturing overhead costs.

Overallocated overhead cost is the amount of manufacturing overhead allocated to work-in-progress in excess of the overhead amount actually incurred. It occurs when the actual manufacturing overhead costs are less than allocated manufacturing overhead costs.

This situation is caused because of diviation of actual results from the estimets. Applied overhead is based on the estimate for the year made at the beginning of the year. Over the period actual overhead is incurred and thus it may be less or more depending on the activity of the organization.