Question

What creates underapplied or overapplied overhead when applying overhead to jobs?

   What creates underapplied or overapplied overhead when applying overhead to jobs?

Cost Accounting: Traditions and Innovations

Cost Accounting: Traditions and Innovations

Jesse T. Barfield,… 4th Edition

Chapter 5, Problem 14

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Manufacturing overhead refers to all indirect factory-related expenses incurred during the production process. This includes costs such as indirect materials, indirect labor, factory rent, factory utilities, and machine depreciation. These costs cannot be directly Show more…

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What creates underapplied or overapplied overhead when applying overhead to jobs?

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Key Concepts

Applied Overhead

Applied overhead is the amount of overhead cost assigned to jobs during the period based on the predetermined overhead rate. It is calculated by multiplying the predetermined rate by the actual quantity of the allocation base used in each job.

Underapplied and Overapplied Overhead

These terms describe the variance between the applied overhead and the actual overhead incurred. Overapplied overhead occurs when the overhead allocated to jobs exceeds the actual overhead costs, while underapplied overhead occurs when the overhead allocated is less than the actual costs. This discrepancy typically arises because the predetermined overhead rate is based on estimates that may not match actual conditions.

Predetermined Overhead Rate

This is an estimate calculated before the period begins by dividing the total estimated overhead costs by the estimated allocation base (such as direct labor hours or machine hours). It is used to apply overhead costs to jobs as work is performed, ensuring that costs are assigned consistently during the period.

Actual Overhead Costs

These are the real overhead expenses incurred during the period. Since actual costs and actual levels of activity can vary from estimates, the actual overhead often differs from the amounts applied to individual jobs.

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