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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 …



Q&A About Underapplied Overhead


What does underapplied overheads represent on an income statement ?

Under appiled overheads represent prepayments on income statement .

In what ways can companies use accounting data for decision making purposes ?

Accounting

How do you calculate an overapplied or underapplied amount?

You calculate an overapplied or underapplied amount by multiplying the actual number of units produced with the difference between the actual and budgeted activity rates.

What are three types of variances found in applied overhead calculations?

There are three types of variances found in applied overhead calculations, which include; (1) efficiency variance, (2) volume variance, and (3) price variance. Efficiency variance measures how well your company's labor hours were used to produce goods compared to standard hours allowed for production activities. Volume variance measures how close your company came to producing its planned output level compared to what was actually produced during a period. Price variance measures how closely your company's actual selling prices matched its standard prices for products sold during a period.

What is a predetermined overhead cost rate?

A predetermined overhead cost rate is a fixed percentage of each unit produced or sold that will be allocated to indirect production costs.

What is the initial predetermined overhead cost rate?

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

What is an unfavorable variance?

An unfavorable variance is a cost that was incurred but not applied to the product.

Is there any way to avoid unfavorable variances ?

Yes , we can avoid unfavourable variances if we keep track all our activities and make sure that all our activities are accounted for .

What are overhead costs?

Overhead costs are indirect costs of production, such as administrative salaries and maintenance expenses.

What does underapplied overhead represent on the balance sheet?

Underapplied overhead represents prepaid expense on the company's balance sheet. It will be balanced at year end with a debit to cost of goods sold. Cost of goods sold represents direct costs associated with production of goods sold by a company. 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 production of goods sold by a company. The amount of underapplied overhead is referred to as an unfavorable variance because it means that actual costs were higher than expected and thus actual COGS was higher than expected for this product or service produced during this period in time..

Why should companies monitor their expenditures carefully ?

Companies should monitor their expenditures carefully so they can have better control over their business .

How do you calculate the initial predetermined overhead cost rate?

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