Underapplied Overhead
Underapplied overhead occurs when the actual overhead costs incurred by a company are greater than the amount of overhead costs allocated or applied to production. It is calculated by subtracting the applied overhead from the actual overhead costs. Underapplied overhead results in a debit balance in the manufacturing overhead account and is considered an unfavorable variance. This is because it means that the company’s budgeted costs were lower than the actual costs. Underapplied overhead is typically reported as a prepaid expense on the balance sheet and is offset by debiting the cost of goods sold (COGS) section.
Key Facts
- Definition: Underapplied overhead occurs when the actual overhead costs incurred by a company are greater than the amount of overhead costs allocated or applied to production.
- Calculation: Underapplied overhead is calculated by subtracting the applied overhead from the actual overhead costs.
- Result: Underapplied overhead results in a debit balance in the manufacturing overhead account.
- Treatment: Underapplied overhead is considered an unfavorable variance because it means that the company’s budgeted costs were lower than the actual costs. It is typically reported as a prepaid expense on the balance sheet and is offset by debiting the cost of goods sold (COGS) section.
Overapplied Overhead:
- Definition: Overapplied overhead occurs when the actual overhead costs incurred by a company are less than the amount of overhead costs allocated or applied to production.
- Calculation: Overapplied overhead is calculated by subtracting the actual overhead costs from the applied overhead.
- Result: Overapplied overhead results in a credit balance in the manufacturing overhead account.
- Treatment: Overapplied overhead is considered a favorable variance because it means that the company’s budgeted costs were higher than the actual costs. It is typically recorded as a credit to the overhead section on the balance sheet and is offset by a credit to the COGS section and a debit to the overhead section.
Overapplied Overhead
Overapplied overhead occurs when the actual overhead costs incurred by a company are less than the amount of overhead costs allocated or applied to production. It is calculated by subtracting the actual overhead costs from the applied overhead. Overapplied overhead results in a credit balance in the manufacturing overhead account and is considered a favorable variance. This is because it means that the company’s budgeted costs were higher than the actual costs. Overapplied overhead is typically recorded as a credit to the overhead section on the balance sheet and is offset by a credit to the COGS section and a debit to the overhead section.
Comparison
Underapplied overhead and overapplied overhead are two different ways that a company can account for the difference between the actual overhead costs incurred and the amount of overhead costs allocated or applied to production. Underapplied overhead is an unfavorable variance, while overapplied overhead is a favorable variance. Underapplied overhead is typically reported as a prepaid expense on the balance sheet and is offset by debiting the COGS section, while overapplied overhead is typically recorded as a credit to the overhead section on the balance sheet and is offset by a credit to the COGS section and a debit to the overhead section.
Sources
- https://study.com/academy/lesson/under-or-over-applied-manufacturing-overhead.html
- https://www.investopedia.com/terms/u/underapplied-overhead.asp
- https://psu.pb.unizin.org/acctg211/chapter/under-or-over-applied-overhead/
FAQs
1. What is underapplied overhead?
Underapplied overhead occurs when the actual overhead costs incurred by a company are greater than the amount of overhead costs allocated or applied to production.
2. How is underapplied overhead calculated?
Underapplied overhead is calculated by subtracting the applied overhead from the actual overhead costs.
3. What is overapplied overhead?
Overapplied overhead occurs when the actual overhead costs incurred by a company are less than the amount of overhead costs allocated or applied to production.
4. How is overapplied overhead calculated?
Overapplied overhead is calculated by subtracting the actual overhead costs from the applied overhead.
5. How are underapplied overhead and overapplied overhead treated differently?
Underapplied overhead is considered an unfavorable variance, while overapplied overhead is considered a favorable variance. Underapplied overhead is typically reported as a prepaid expense on the balance sheet and is offset by debiting the COGS section, while overapplied overhead is typically recorded as a credit to the overhead section on the balance sheet and is offset by a credit to the COGS section and a debit to the overhead section.
6. What are the implications of underapplied overhead?
Underapplied overhead can lead to higher costs of goods sold and lower profits. It can also indicate that the company’s budgeting process is inaccurate or that there are inefficiencies in the production process.
7. What are the implications of overapplied overhead?
Overapplied overhead can lead to lower costs of goods sold and higher profits. It can also indicate that the company’s budgeting process is inaccurate or that there is excess capacity in the production process.
8. How can companies avoid underapplied and overapplied overhead?
Companies can avoid underapplied and overapplied overhead by accurately budgeting for overhead costs and by monitoring the production process to ensure that overhead costs are being allocated correctly.