The over or under-applied manufacturing overhead is characterized as the difference in between manufacturing overhead cost applied to occupational in procedure and manufacturing overhead cost actually incurred throughout a period.

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If the production overhead cost used to work in process is an ext than the production overhead cost actually incurred throughout a period, the difference is known as over-applied manufacturing overhead. On the various other hand; if the production overhead cost applied to work in process is much less than the manufacturing overhead price actually incurred during a period, the difference is known as under-appliedmanufacturing overhead.

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The incident of over or under-applied overhead is typical in production businesses due to the fact that overhead is applied to work-related in procedure using a predetermined overhead rate. A predetermined overhead rate is computed at the beginning of the duration using estimated information and is supplied to apply manufacturing overhead price throughout the period.

The procedure of computer predetermined overhead rate and its usage in using manufacturing overhead has been defined in “measuring and also recording production overhead cost” article.

Recording actual and applied overhead cost in manufacturing overhead account:

Over or under-applied manufacturing overhead is actually the debit or credit balance of manufacturing overhead account (also recognized as factory overhead account).

Actual production overhead costs are debited and applied manufacturing overhead costs are attributed to production overhead account. Really overhead prices are debited together they room incurred and applied overhead prices are credited as castle are used to work-related in process. In ~ the finish of a period, if manufacturing overhead account reflects a debit balance, it way the overhead is under-applied. On the various other hand; if it reflects a credit balance, it means the overhead is over-applied. For further explanation that the concept, consider the adhering to example:

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The debit or credit balance in manufacturing overhead account in ~ the finish of a month is carried forward come the following month till the end of a particular period – normally one year.


Disposition of over or under-applied manufacturing overhead:

At the end of the year, the balance in manufacturing overhead account (over or under-applied manufacturing overhead) is disposed off by one of two people allocating it among work in process, perfect goods and also cost of goods sold accounts or transporting the whole amount to cost of products sold account. These two methods have actually been questioned below:

Allocation among work in process, finished goods and also cost of items sold account:

Under this method, the lot of end or under-applied overhead is disposed turn off by allocating it amongst work in process, finished goods and also cost of items sold accounts on the basis of overhead used in each of the accounts throughout the period. The adhering to journal entrance 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 much more accurate than 2nd method. The just disadvantage of this method is the it is more time consuming.

Transferring the entire amount of over or under-applied to price of goods sold:

Under this method the entire amount of end or under applied overhead is moved to cost of items sold. The complying with entry is created this purpose:

When overhead is under-applied:

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When overhead is over-applied:

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This technique is no as specific as first method. Providers use this method because it is much less time consuming and also easy come use.


Example:

During the year 2012, Beta firm started two jobs – project A and job B . Project A had 1,000 units and also job B contained 500 units. At the finish of the year 2012, job A was completed but job B was in process. The information around manufacturing overhead cost applied to job A and also B was together follows:

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The actual manufacturing overhead cost incurred by the company during 2012 was $108,000. The end of 1,000 systems in job A, 750 units had been sold before the finish of 2012.

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Required: calculation over or under applied manufacturing overhead and also make journal entries required to dispose turn off over or under applied manufacturing overhead assuming:

It is disposed off by allocating in between inventory and cost of items sold accounts.It is disposed turn off by delivering to cost of goods sold.

Solution:

Calculation of end or under-applied manufacturing overhead:

In our example, manufacturing overhead is under-applied due to the fact that actual overhead is an ext than used overhead. The under-applied overhead has been calculated below:

Under-applied manufacturing overhead =Total production overhead cost actually incurred –Total manufacturing overhead applied to work-related in process

= $108,000 – $100,000

= $8,000

Journal entries to dispose turn off under-applied overhead:

(i). Allocation that under-applied overhead among work in process, finished goods, and also cost of goods sold accounts: