Overapplied overhead

Definition

Overapplied overhead occurs when the estimated overhead costs allocated to production exceed the actual overhead costs incurred. This results in a credit balance in the overhead account at the end of the accounting period.

5 Must Know Facts For Your Next Test

1. Overapplied overhead indicates that too much overhead was allocated to jobs during the period.
2. Overapplied overhead can result from overestimating manufacturing activities or efficiencies.
3. The adjustment for overapplied overhead typically involves debiting the manufacturing overhead account and crediting Cost of Goods Sold (COGS).
4. Companies may choose to prorate overapplied overhead across Work in Process, Finished Goods, and COGS.
5. Overapplied overhead affects financial statements by potentially overstating expenses and understating net income.

Review Questions

• What does it mean if a company has overapplied overhead?
• How is overapplied overhead adjusted at the end of an accounting period?
• What impact does overapplied overhead have on financial statements?

Related terms

Underapplied Overhead: Occurs when actual overhead costs are higher than those allocated to production, resulting in a debit balance.

Predetermined Overhead Rate: A rate calculated before a period begins by dividing estimated total manufacturing overhead costs by an estimated cost driver.

Cost of Goods Sold (COGS): The direct costs attributable to goods produced and sold by a business, including materials, labor, and allocated manufacturing costs.