{"id":118,"date":"2015-06-25T22:12:19","date_gmt":"2015-06-25T22:12:19","guid":{"rendered":"https:\/\/courses.candelalearning.com\/managacct2x10xmaster\/?post_type=chapter&p=118"},"modified":"2015-12-09T17:17:50","modified_gmt":"2015-12-09T17:17:50","slug":"factory-overhead-calculations","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-managacct\/chapter\/factory-overhead-calculations\/","title":{"raw":"2.5 Under- or Over-applied Overhead","rendered":"2.5 Under- or Over-applied Overhead"},"content":{"raw":"
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\r\n\r\nSince we will be using the concept of the predetermined overhead rate many times during the semester, lets review what it means again.\r\n\r\nhttps:\/\/youtu.be\/orjRQjE_ZqE\r\n\r\nWe know overhead is applied using estimated or budgeted overhead and a base.\u00a0 Actual overhead costs may be different and we will not have all of those costs until late in the year.\u00a0 Estimated may be close but is rarely accurate with what really happens, so the result is Over-applied or Under-applied Overhead<\/strong>.\u00a0 At the end of the year, we will compare the applied overhead to the actual overhead and if applied overhead is GREATER than actual overhead, overhead is over-applied.\u00a0 If applied overhead is less than actual overhead, overhead is under-applied.\u00a0 But how do we correct it?\r\n\r\nhttps:\/\/youtu.be\/FkS_mbt7f6k\r\n\r\nExample - Creative Printers<\/strong>\r\n\r\nWe learned, in the previous pages, that Creative Printers had applied overhead to Jobs 106 and 107 for a total amount of $9,850.\u00a0 Actual overhead was $9,800 from indirect materials $1,000, indirect labor of $2,000 and other overhead of $6,800.\u00a0 If we compare applied overhead $9,850 and actual overhead $9,000, we see a difference of $50 over-applied since the applied amount is greater than the actual overhead.\u00a0\u00a0 Companies generally transfer the balance of the Overhead account to Cost of Goods Sold at the end of the accounting period. Some companies do this monthly; others do it quarterly or annually. The journal entry to transfer Creative Printers\u2019 overhead balance to Cost of Goods Sold for the month of July is as follows:\r\n\r\n\r\n\r\n\r\n\r\n\r\n
<\/td>\r\n\u00a0Debit\u00a0 <\/strong><\/td>\r\n\u00a0Credit\u00a0 <\/strong><\/td>\r\n<\/tr>\r\n
Overhead<\/td>\r\n50<\/td>\r\n<\/td>\r\n<\/tr>\r\n
\u00a0 Cost of goods sold<\/td>\r\n<\/td>\r\n50<\/td>\r\n<\/tr>\r\n
\u00a0To record over-applied overhead.<\/em>\u00a0<\/em>\r\n<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nWhy does the previous entry reduce the Cost of Goods Sold by $50? The overhead cost applied to the jobs was too high\u2014it was overapplied. Thus, the cost of jobs was overstated or we charged to much cost to jobs. Although those jobs are still in Work in Process or Finished Goods Inventory, companies usually adjust the Cost of Goods Sold account instead of each inventory account. Adjusting each inventory account for a small overhead adjustment is usually not a good use of managerial and accounting time and effort. All jobs appear in Cost of Goods Sold sooner or later, so companies simply adjust Cost of Goods Sold instead of the inventory accounts.\r\n\r\nIf applied overhead was less than actual overhead, we have under-applied overhead or not charged enough cost.\u00a0 The entry to correct under-applied overhead, using cost of goods sold, would be (XX represents the amount of under-applied overheard or the difference between applied and actual overhead<\/em>):\r\n\r\n\r\n\r\n\r\n\r\n\r\n
<\/td>\r\n\u00a0Debit\u00a0 <\/strong><\/td>\r\n\u00a0Credit\u00a0 <\/strong><\/td>\r\n<\/tr>\r\n
Cost of goods sold<\/td>\r\nXX<\/td>\r\n<\/td>\r\n<\/tr>\r\n
\u00a0 Overhead<\/td>\r\n<\/td>\r\nXX<\/td>\r\n<\/tr>\r\n
\u00a0To record under-applied overhead.<\/em>\u00a0<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nIn this book, we assume companies transfer overhead balances to Cost of Goods Sold. We leave the more complicated procedure of allocating overhead balances to inventory accounts to textbooks on cost accounting.\r\n\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>","rendered":"
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Since we will be using the concept of the predetermined overhead rate many times during the semester, lets review what it means again.<\/p>\n

https:\/\/youtu.be\/orjRQjE_ZqE<\/p>\n

We know overhead is applied using estimated or budgeted overhead and a base.\u00a0 Actual overhead costs may be different and we will not have all of those costs until late in the year.\u00a0 Estimated may be close but is rarely accurate with what really happens, so the result is Over-applied or Under-applied Overhead<\/strong>.\u00a0 At the end of the year, we will compare the applied overhead to the actual overhead and if applied overhead is GREATER than actual overhead, overhead is over-applied.\u00a0 If applied overhead is less than actual overhead, overhead is under-applied.\u00a0 But how do we correct it?<\/p>\n