The factory overhead account is (debited/credited) for actual overhead costs.

Overapplied overhead occurs when the total amount of factory overhead costs assigned to produced units is more than was actually incurred in the period. This usually happens when a business uses a standard long-term overhead rate that is based on the average amount of factory overhead that is likely to be incurred, and the average number of units produced. In some periods, either the number of units produced will be greater than expected, or actual factory overhead costs will be lower than expected. In these situations, the use of a standard overhead rate will result in overapplied overhead.

When overhead has been overapplied, the proper accounting is to debit the manufacturing overhead cost pool and credit the cost of goods sold in the amount of the overapplication. Doing so results in the actual amount of overhead incurred being charged through the cost of goods sold.

Over the long-term, the use of a standard overhead rate should result in some months in which overhead is overapplied, and some months in which it is underapplied. On average, however, the amount of overhead applied should approximately match the actual amount of overhead incurred.

As you’ve learned, the actual overhead incurred during the year is rarely equal to the amount that was applied to the individual jobs. Thus, at year-end, the manufacturing overhead account often has a balance, indicating overhead was either overapplied or underapplied.

Nội dung chính Show

• Kraken Boardsports
• Is factory overhead debited or credited?
• Which account is credited when overhead is applied?
• Why is factory overhead debited?
• Is Overapplied overhead a debit or credit?

If, at the end of the term, there is a debit balance in manufacturing overhead, the overhead is considered underapplied overhead. A debit balance in manufacturing overhead shows either that not enough overhead was applied to the individual jobs or overhead was underapplied. If, at the end of the term, there is a credit balance in manufacturing overhead, more overhead was applied to jobs than was actually incurred. This shows the actual amount was overapplied overhead.

The actual overhead costs are recorded through a debit to manufacturing overhead. The same account is credited when overhead is applied to the individual jobs in production, as shown:

Figure 8.4 By: Rice University Openstax CC BY SA 4.0

Since the overhead is first recorded in the manufacturing overhead account, then applied to the individual jobs, traced through finished goods inventory, and eventually transferred to cost of goods sold, the year-end balance is eliminated through an adjusting entry, offsetting the cost of goods sold. If manufacturing overhead has a debit balance, the overhead is underapplied, and the resulting amount in cost of goods sold is understated. The adjusting entry is:

Figure 8.5 By: Rice University Openstax CC BY SA 4.0

If manufacturing overhead has a credit balance, the overhead is overapplied, and the resulting amount in cost of goods sold is overstated. The adjusting entry is:

Figure 8.6 By: Rice University Openstax CC BY SA 4.0

Returning to our example, at the end of the year, Dinosaur Vinyl had actual overhead expenses of $256,500 and applied overhead expenses of $250,000, as shown:

Figure 8.7 By: Rice University Openstax CC BY SA 4.0

Since manufacturing overhead has a debit balance, it is underapplied, as it has not been completely allocated. The adjusting journal entry is:

Figure 8.8 By: Rice University Openstax CC BY SA 4.0

If the overhead was overapplied, and the actual overhead was $248,000 and the applied overhead was $250,000, the entry would be:

Figure 8.9 By: Rice University Openstax CC BY SA 4.0

To adjust for overapplied or underapplied manufacturing overhead, some companies have a more complicated, three-part allocation to work in process, finished goods, and cost of goods sold. This method is typically used in the event of larger variances in their balances or in bigger companies. (You will learn more about this in future cost or advanced managerial accounting courses.)

YOUR TURN

Kraken Boardsports

Kraken Boardsports manufactures winches for snow and ski boarders to snow ski without a mountain or water ski without a lake (Figure 8.10). End-of-year data show these overhead expenses:

Figure 8.11 By: Rice University Openstax CC BY SA 4.0

Kraken Boardsports had 6,240 direct labor hours for the year and assigns overhead to the various jobs at the rate of $33.50 per direct labor hour.

How much overhead was overapplied or underapplied during the year? What would be the journal entry to adjust manufacturing overhead?

Overapplied overhead occurs when the total amount of factory overhead costs assigned to produced units is more than was actually incurred in the period. This usually happens when a business uses a standard long-term overhead rate that is based on the average amount of factory overhead that is likely to be incurred, and the average number of units produced. In some periods, either the number of units produced will be greater than expected, or actual factory overhead costs will be lower than expected. In these situations, the use of a standard overhead rate will result in overapplied overhead.

When overhead has been overapplied, the proper accounting is to debit the manufacturing overhead cost pool and credit the cost of goods sold in the amount of the overapplication. Doing so results in the actual amount of overhead incurred being charged through the cost of goods sold.

Over the long-term, the use of a standard overhead rate should result in some months in which overhead is overapplied, and some months in which it is underapplied. On average, however, the amount of overhead applied should approximately match the actual amount of overhead incurred.

Is factory overhead debited or credited?

In which account is factory overheads debited to?

Why is factory overhead debited?

Is Overapplied overhead a debit or credit?