Question

What we will do if we have underapplied overhead and overapplied overhead in the income statement.
Show me also the adjustment entry as well.

Answer 1

The term underapplied overhead refers to a situation that arises when overhead expenses amount to more than what a company actually budgets for in order to run its operations. Underapplied overhead is normally reported as a prepaid expense on a company's balance sheet and is balanced by inputting a debit to the cost of goods sold (COGS) section by the end of the year. Costs of goods sold are the direct cost associated with the production of goods sold by a company. The amount of underapplied overhead is referred to as an unfavorable variance.

Overapplied overhead is excess amount of overhead applied during a production period over the actual overhead incurred during the period. In other words, it’s the amount that the estimated overhead exceeds the actual overhead incurred for a production period.

enerally any balance in the account is treated in one of the two ways.

1. Closed out to cost of goods sold.

2. Allocated between work in process (WIP), finished goods and cost of goods sold in proportion to the overhead applied during the current period in the ending balances of these account.

The second method, which allocates the under or overapplied overhead among ending inventories and cost of goods sold is equivalent to using an “actual” overhead rate and is for that reason considered by many to be more accurate than the first method. Consequently, if the amount of underapplied or overapplied overhead is material, many accountants would insist that the second method be used.