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At the end of the accounting period manufacturing overhead will be either over – applied or...

At the end of the accounting period manufacturing overhead will be either over – applied or under – applied. Explain how each of these may happen?

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Answer #1

At the start of the year a predetermined manufacturing overhead rate is calculated using estimated manufacturing overheads to apply manufacturing overhead to jobs that will be completed in the year. Predetermined overhead rate is necessary because it’s nearly impossible (or we could say unjustified) to ascertain the amount of overheads a particular job has expended.

When overheads applied throughout the year are more than actual overheads (actual overheads are known only at the end of the year) the overheads are called to be over-applied on the other hand when applied overheads are less than actual overheads the its said that overheads are under-applied. These Underapplied and Overapplied overheads are then adjusted with Ending inventory, WIP inventory and Cost of goods sold, or any one or two of the above depending upon policy of company.

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