The following journal entry is made to dispose off an over or under-applied overhead: When overhead is under-applied: When overhead is over-applied: Under this method, the amount of over or under-applied overhead is disposed off by allocating it among work in process, finished goods and cost of goods sold accounts on the basis of overhead applied in each of the accounts during the period. These two methods have been discussed below: Method 1: Allocation among work in process, finished goods and cost of goods sold account: Disposition of over or under-applied manufacturing overhead:Īt the end of the year, the balance in manufacturing overhead account (over or under-applied manufacturing overhead) is disposed off by either allocating it among work in process, finished goods and cost of goods sold accounts or transferring the entire amount to cost of goods sold account. The debit or credit balance in manufacturing overhead account at the end of a month is carried forward to the next month until the end of a particular period – usually one year. IN ABOVE EXAMPLE, THE OVERHEAD IS OVER-APPLIED BY $5,000 For further explanation of the concept, consider the following example of manufacturing overhead account: On the other hand, if it shows a credit balance, it means the overhead is over-applied. At the end of a period, if manufacturing overhead account shows a debit balance, it means the overhead is under-applied. All actual overhead costs are debited as they are incurred and applied overhead costs are credited as they are applied to work in process. Over or under-applied manufacturing overhead is actually the debit or credit balance of an entity’s manufacturing overhead account (also known as factory overhead account).Īctual manufacturing overhead costs are debited and applied manufacturing overhead costs are credited to manufacturing overhead account. Recording actual and applied overhead cost in manufacturing overhead account: In the rest of this article, we will discuss how over or under-applied overhead cost is handled in a manufacturing environment. The procedure of computing predetermined overhead rate and its use in applying manufacturing overhead has been described in “measuring and recording manufacturing overhead cost” article. A predetermined overhead rate is computed at the beginning of the period using estimated information and is used to apply manufacturing overhead cost throughout the period. The occurrence of over or under-applied overhead is normal in manufacturing businesses because overhead is applied to work in process using a predetermined overhead rate. If, on the other hand, the manufacturing overhead cost applied to work in process is less than the manufacturing overhead cost actually incurred during a period, the difference is known as under-applied manufacturing overhead. If the manufacturing overhead cost applied to work in process is more than the manufacturing overhead cost actually incurred during a period, the difference is known as over-applied manufacturing overhead. The over or under-applied manufacturing overhead is defined as the difference between manufacturing overhead cost applied to work in process and manufacturing overhead cost actually incurred by the entity during the period.
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