23 Determine and Dispose of Underapplied or Overapplied Overhead

As you’ve learned, the yes, really overhead incurred during the year is rarely equal come the amount that was applied to the individual jobs. Thus, at year-end, the manufacturing overhead account often has a balance, denote overhead to be either overapplied or underapplied.

You are watching: A credit balance in the manufacturing overhead account

If, at the finish of the term, there is a debit balance in manufacturing overhead, the overhead is taken into consideration underapplied overhead. A debit balance in manufacturing overhead mirrors either that not sufficient overhead was used to the individual work or overhead to be underapplied. If, in ~ the end of the term, over there is a credit transaction balance in manufacturing overhead, more overhead was applied to jobs than was in reality incurred. This mirrors the really amount to be overapplied overhead.

The yes, really overhead prices are tape-recorded through a debit to manufacturing overhead. The very same account is attributed when overhead is applied to the individual jobs in production, as shown:

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If manufacturing overhead has actually a credit balance, the overhead is overapplied, and the resulting amount in expense of items sold is overstated. The adjusting entry is:

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Since manufacturing overhead has a debit balance, that is underapplied, as it has actually not been completely allocated. The adjusting journal entry is:

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To readjust for overapplied or underapplied manufacturing overhead, some companies have actually a an ext complicated, three-part assignment to occupational in process, finished goods, and also cost of products sold. This an approach is frequently used in the occasion of larger variances in your balances or in larger companies. (You will certainly learn an ext about this in future expense or progressed managerial accountancy courses.)


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Kraken Boardsports had 6,240 straight labor hrs for the year and also assigns overhead come the various jobs at the rate of $33.50 per straight labor hour.

How lot overhead was overapplied or underapplied during the year? What would be the journal entry to adjust manufacturing overhead?

Solution

The total overhead occurs is the total of:

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The adjusting journal entry is:

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Job bespeak costing and overhead allocation are not new methods of accountancy and apply to governmental units as well. See it applied in this 1992 report top top Accounting for Shipyard Costs and Nuclear Waste disposal Plans indigenous the United states General accountancy Office.


Key Concepts and also Summary

Overhead is allocated to individual jobs based on the estimated overhead costs for the year and also may be overapplied or underapplied because that the year.Overhead is underapplied when not every one of the costs built up in the production overhead account are applied during the year.Overhead is overapplied when much more overhead is used to the jobs than was in reality incurred.The lot of overhead overapplied or underapplied is readjusted into the cost of items sold account.

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Expenses typically have a debit balance, and also the production overhead account is debited when prices are incurred to identify the incurrence. As soon as the costs are allocated to the asset, the work-related in procedure inventory, the expense account production overhead is credited. This is in accordance v the cost recognition principle. The time of the expense follows the revenue, and also when the costs are allocated to inventory, they end up being a part of the product’s cost and also are recognized when the asset is sold.