Underapplied Overhead

Underapplied Overhead

In accounting, an estimate of overhead for a work-in-process product that is less than the overhead actually is. This may happen for any number of reasons. Because underapplied overhead means profits are lower than the records say they should be, it is subtracted from the cost of goods sold at the end of the accounting period. See also: Overapplied overhead.
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Since the applied overhead of $1,250 is less than the actual overhead of $1,500, we have $250 of underapplied overhead.
Teaching Opportunity: Discussion of overapplied and underapplied overhead and how these amounts are disposed of at the end of the period.
Any sort of capacity-based cost accounting system virtually ensures that there will be underapplied overhead at the end of any accounting period.