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.
Mentioned in ?
References in periodicals archive ?
Fourth, the final step of juxtaposing actual overhead and applied overhead at the end of the period to determine the difference and then closing overapplied or underapplied overhead can be a challenge.
An active learning approach incorporates input from students as to which accounts overapplied or underapplied overhead should be closed.
Work-in-Process Finished Goods Cost of Goods Sold 281,000 800,000 800,000 500,000 500,000 459,000 510,000 450,000 300,000 500,000 Ending balances: Work-in-Process $ 450,000 [$450,000 / $1,250,000] x $33,000 = $11,880 Finished Goods 300,000 [$300,000 / $1,250,000] x $33,000 = $ 7,920 Cost of Goods Sold 500,000 [$500,000 / $1,250,000] x $33,000 = $13,200 $ 1,250,000 Note that one way to check for accuracy and especially for a rounding problem is to determine if the total amount of overhead prorated to the three appropriate accounts ($11,880 + $7,920 + $13,200) equals the total underapplied overhead of $33,000.
Since the applied overhead of $1,250 is less than the actual overhead of $1,500, we have $250 of underapplied overhead.
Any sort of capacity-based cost accounting system virtually ensures that there will be underapplied overhead at the end of any accounting period.