Question

Under/Over applied factory overhead - discussion At What causes the factory overhead account to be over/underapplied? Your answer should not just tell us that the account has a credit or debit balance but what caused the account to have this balance. Be as specific as you can be

Answer 1

Under/Over applied factory overhead is the difference between Overhead cost applied and factory overhead cost actually incurred.

If a Factory overhead cost applied to work in process is more than the actual factory overhead cost incurred , then the difference amount is called over-applied factory overheads.

Similarly if a factory overhead cost applied to work in process is less than the actual factory overhead cost incurred , then the difference amount is called under applied factory overheads.

At the end of period , if the factory overhead account shows a debit balance, it means the overhead is under-applied. On the other hand , if factory overhead shows a credit balance , it means the overhead is over applied.

Overheads are applied using a predetermined rate calculated at the beginning of period using estimated information.

For example ,

Total estimated overheads = $1000000

Total Estimated direct labour hours = 100000 hours

So predetermined overhead = $1000000/100000 hours =$10 per hour

Now this predetermined rate will be applied to actual direct labor hours

Suppose actual labour hours is 90000 and actual overheads is $850000

So overheads applied = 90000 hours * $10 per hour = $900000

Here Applied overheads is more than actual overheads so the overheads are over-applied by $50000

Similarly if the actual overheads is $960000. Now Applied overhead cost is less than actual overheads cost. So the overheads are under applied by $60000.