The over or under-applied production overhead is defined as the difference in between manufacturing overhead cost applied to work in process and manufacturing overhead expense actually incurred during a period.

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If the manufacturing overhead cost applied to work in procedure is an ext than the manufacturing overhead price actually incurred during a period, the distinction is known as over-applied production overhead. Top top the other hand; if the manufacturing overhead cost applied to work-related in procedure is much less than the manufacturing overhead cost actually incurred throughout a period, the distinction is recognized as under-appliedmanufacturing overhead.

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The event of end or under-applied overhead is common in manufacturing businesses because overhead is used to work in procedure using a predetermined overhead rate. A predetermined overhead price is computed at the start of the duration using approximated information and is provided to use manufacturing overhead cost throughout the period.

The procedure of computing predetermined overhead rate and its usage in applying manufacturing overhead has actually been explained in “measuring and also recording production overhead cost” article.

Recording actual and also applied overhead expense in manufacturing overhead account:

Over or under-applied manufacturing overhead is in reality the debit or credit transaction balance the manufacturing overhead account (also well-known as factory overhead account).

Actual manufacturing overhead costs room debited and also applied production overhead costs are attributed to production overhead account. Really overhead prices are debited as they space incurred and also applied overhead prices are credited as castle are applied to work in process. In ~ the finish of a period, if production overhead account reflects a debit balance, it way the overhead is under-applied. Top top the various other hand; if it shows a credit balance, it method the overhead is over-applied. For additional explanation the the concept, consider the following example:

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The debit or credit balance in production overhead account at the end of a month is brought forward come the next month until the finish of a particular period – usually one year.


Disposition of over or under-applied manufacturing overhead:

At the end of the year, the balance in manufacturing overhead account (over or under-applied manufacturing overhead) is disposed turn off by one of two people allocating it amongst work in process, perfect goods and also cost of products sold account or moving the entire amount to cost of items sold account. These 2 methods have been discussed below:

Allocation among work in process, finished goods and cost of products sold account:

Under this method, the amount of over or under-applied overhead is disposed off by allocation it among work in process, finished goods and cost of products sold accounts on the basis of overhead used in every of the accounts during the period. The adhering to journal entry is made to dispose turn off an end or under-applied overhead:

When overhead is under-applied:

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When overhead is over-applied:

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This method is an ext accurate than second method. The just disadvantage of this an approach is that it is much more time consuming.

Transferring the whole amount of end or under-applied to expense of items sold:

Under this method the whole amount of over or under used overhead is transferred to expense of goods sold. The following entry is made for this purpose:

When overhead is under-applied:

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When overhead is over-applied:

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This technique is not as precise as first method. Companies use this technique because the is much less time consuming and easy to use.


Example:

During the year 2012, Beta agency started two tasks – job A and also job B . Task A consisted of 1,000 units and job B consisted of 500 units. At the end of the year 2012, project A was completed however job B was in process. The information around manufacturing overhead cost applied to project A and also B was together follows:

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The actual manufacturing overhead price incurred by the agency during 2012 was $108,000. The end of 1,000 devices in task A, 750 units had actually been sold prior to the finish of 2012.

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Required: calculation over or under applied manufacturing overhead and make journal entries forced to dispose off over or under used manufacturing overhead assuming:

It is disposed turn off by allocating in between inventory and also cost of products sold accounts.It is disposed off by transferring to expense of items sold.

Solution:

Calculation of end or under-applied manufacturing overhead:

In our example, manufacturing overhead is under-applied because actual overhead is much more than applied overhead. The under-applied overhead has actually been calculate below:

Under-applied manufacturing overhead =Total manufacturing overhead price actually occurs –Total production overhead applied to occupational in process

= $108,000 – $100,000

= $8,000

Journal entries to dispose turn off under-applied overhead:

(i). Allocation that under-applied overhead among work in process, perfect goods, and cost of goods sold accounts: