Lessons · Accounting · applying overhead, and the amount left over
Applying overhead, and the amount left over
Overhead applied is the predetermined rate times the ACTUAL activity. It will not equal the overhead actually incurred, and the difference is called over-applied when too much was charged and under-applied when too little was.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.
What it is for
The difference is not an error to hunt down; it is the arithmetic consequence of using an estimate. What matters is knowing which way it went, because under-applied overhead means the jobs costed during the year were charged too little, and any pricing decision made from those costs was made on a number that was too low.
How to think about it
Multiply the rate by the actual activity to get applied overhead. Compare with actual overhead incurred. Applied above actual is over-applied; applied below actual is under-applied.
Worked example
Rate 6.00; actual machine hours 31,000The rate was set in advance; the hours are what happened.
Applied = 6.00 × 31,000 = 186,000What was charged to jobs during the year.
Actual overhead incurred = 182,000What was really spent.
Over-applied by 4,000More was charged to jobs than was spent, so the jobs were costed slightly high.
Your turn
Rate 6.00 and actual machine hours 31,000. Write the line that gives applied overhead.
Applied = 6.00 × = 186,000
Solve one, graded on the server
The trap
Applying the rate to the ESTIMATED activity. That reproduces the estimate exactly and can never differ from it, which quietly removes the one signal telling you the estimate was wrong.