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Underapplied Overhead

What is 'Underapplied Overhead'

An accounting record in cost accounting where the overhead costs assigned for a work-in-progress product does not reach the amount of the actual overhead costs. Underapplied overhead is reported as a prepaid expense on the company's balance sheet and, at the end of the year, it is balanced by inputing a debit to cost of goods sold. Costs of goods sold is 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.

Explaining 'Underapplied Overhead'

For example, an overhead of $100,000 was incurred, but only $90,000 was applied. This is referred to as an unfavorable variance because it means that the budgeted costs were lower than actual costs and thus the cost of goods sold of the product were more than expected.


The initial predetermined overhead cost rate is calculated by taking the budgeted overhead costs divided by the budgeted activity.


Further Reading


Cost-Volume-Profit Analysis and Changing Costs: Reconciling Theory and Practice
www.tandfonline.com [PDF]
… exercises a great caution such that the amount of the under-applied overhead does not … G. & Schroeder, RG (1995), 'An Empirical Analysis of Manufacturing Overhead Cost Drivers … 2000 Mc Graw-Hill, New York Develin, N. (1999), Unlocking Overheads Values: Management …

Direct Materials, Direct Labour, the Mechanics of Cost Allocation and Overhead AnalysisDirect Materials, Direct Labour, the Mechanics of Cost Allocation and Overhead Analysis
link.springer.com [PDF]
… exercises a great caution such that the amount of the under-applied overhead does not … G. & Schroeder, RG (1995), 'An Empirical Analysis of Manufacturing Overhead Cost Drivers … 2000 Mc Graw-Hill, New York Develin, N. (1999), Unlocking Overheads Values: Management …

Zen Accounting: How Japanese Management Accounting Practice Supports Lean Management.Zen Accounting: How Japanese Management Accounting Practice Supports Lean Management.
search.ebscohost.com [PDF]
… exercises a great caution such that the amount of the under-applied overhead does not … G. & Schroeder, RG (1995), 'An Empirical Analysis of Manufacturing Overhead Cost Drivers … 2000 Mc Graw-Hill, New York Develin, N. (1999), Unlocking Overheads Values: Management …

Does SFAS no. 151 trigger more overproduction?Does SFAS no. 151 trigger more overproduction?
meridian.allenpress.com [PDF]
… exercises a great caution such that the amount of the under-applied overhead does not … G. & Schroeder, RG (1995), 'An Empirical Analysis of Manufacturing Overhead Cost Drivers … 2000 Mc Graw-Hill, New York Develin, N. (1999), Unlocking Overheads Values: Management …


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