The over or under-used manufacturing overhead is defined as the difference in between production overhead expense applied to work in process and production overhead price actually incurred in the time of a duration.

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If the production overhead expense used to job-related in process is more than the production overhead expense actually incurred during a duration, the distinction is recognized as over-applied manufacturing overhead. On the various other hand; if the production overhead price used to job-related in process is less than the manufacturing overhead cost actually incurred during a duration, the distinction is known as under-appliedmanufacturing overhead.

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The occurrence of over or under-applied overhead is normal in production businesses bereason overhead is applied to work-related in procedure making use of a preestablished overhead rate. A preidentified overhead rate is computed at the start of the period making use of approximated indevelopment and also is used to use manufacturing overhead expense throughout the duration.

The procedure of computing preidentified overhead price and also its use in applying manufacturing overhead has actually been explained in “measuring and recording production overhead cost” post.

Recording actual and also applied overhead expense in production overhead account:

Over or under-used production overhead is actually the delittle bit or credit balance of manufacturing overhead account (also recognized as factory overhead account).

Actual manufacturing overhead costs are debited and also used production overhead costs are attributed to production overhead account. Actual overhead costs are debited as they are incurred and applied overhead costs are attributed as they are used to job-related in procedure. At the finish of a period, if production overhead account mirrors a delittle bit balance, it means the overhead is under-used. On the various other hand; if it reflects a credit balance, it suggests the overhead is over-applied. For additionally explacountry of the principle, think about the complying with example:

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The debit or crmodify balance in manufacturing overhead account at the finish of a month is carried forward to the following month until the end of a specific duration – generally one year.


Disposition of over or under-used production overhead:

At the end of the year, the balance in manufacturing overhead account (over or under-used manufacturing overhead) is disposed off by either allocating it among occupational in procedure, finished goods and cost of goods offered accounts or moving the whole amount to price of items marketed account. These 2 methods have actually been disputed below:

Alarea among job-related in process, finimelted items and also cost of goods marketed account:

Under this approach, the amount of over or under-applied overhead is disposed off by allocating it among job-related in process, finished items and expense of products sold accounts on the basis of overhead used in each of the accounts in the time of the duration. The adhering to journal enattempt is made to dispose off an over or under-applied overhead:

When overhead is under-applied:

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When overhead is over-applied:

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This technique is even more specific than second technique. The just disadvantage of this strategy is that it is more time consuming.

Transferring the whole amount of over or under-applied to cost of goods sold:

Under this technique the whole amount of over or under applied overhead is moved to expense of goods marketed. The following entry is produced this purpose:

When overhead is under-applied:

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When overhead is over-applied:

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This approach is not as accurate as first method. Companies usage this approach because it is much less time consuming and also basic to use.


Example:

During the year 2012, Beta agency began 2 tasks – task A and task B . Job A included 1,000 devices and job B contained 500 devices. At the end of the year 2012, project A was completed yet project B remained in process. The indevelopment around manufacturing overhead cost applied to project A and B was as follows:

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The actual manufacturing overhead cost incurred by the agency during 2012 was $108,000. Out of 1,000 devices in project A, 750 units had been marketed prior to the end of 2012.

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Required: Calculate over or under used manufacturing overhead and make journal entries required to dispose off over or under used manufacturing overhead assuming:

It is disposed off by allocating between inventory and cost of products marketed accounts.It is disposed off by transporting to cost of items offered.

Solution:

Calculation of over or under-applied manufacturing overhead:

In our example, production overhead is under-used because actual overhead is more than used overhead. The under-applied overhead has actually been calculated below:

Under-used manufacturing overhead =Total manufacturing overhead cost actually incurred –Total manufacturing overhead applied to occupational in process

= $108,000 – $100,000

= $8,000

Journal entries to dispose off under-used overhead:

(i). Alplace of under-used overhead among occupational in procedure, finiburned products, and also price of products marketed accounts: