Over- or under-applied overhead
Over- or under-applied overhead is the difference between overhead applied to production using the predetermined rate and overhead actually incurred.
Also known asunderapplied overhead
FrameworkNormal costing
See it move
The infographic is a side-by-side comparison panel contrasting applied and actual overhead. The left column shows applied overhead calculated as €8 per hour × 12,000 hours = €96,000; the right column shows actual factory overhead of €101,000, leaving an underapplied gap of €5,000. Because actual overhead exceeds what was applied, the €5,000 shortfall is closed by adding it to cost of goods sold at the period end.
The formula
Variables
- Manufacturing overhead applied to jobs in the period (€)
- Predetermined overhead rate (€ per activity unit)
- Actual activity units used in the period (activity units)
Applied overhead is added to jobs throughout the year using the estimated rate set before the period starts.
Variables
- Overhead applied to jobs via the predetermined rate (€)
- Actual manufacturing overhead incurred in the period (€)
A positive result is overapplied (too much loaded onto jobs); a negative result is underapplied. The balance is closed to cost of goods sold at year end.
Check yourself
A manufacturer sets a predetermined overhead rate of €18 per machine-hour. During the year, 9,500 machine-hours are worked and actual manufacturing overhead incurred is €178,300. What is the overhead variance, and how is it classified?