Wize University Managerial Accounting Textbook > Job-Order Costing
Over- or Under-Applying Manufacturing Overhead
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Over- or Under-Applying Manufacturing Overhead
Since overhead is calculated using an estimated rate, an adjustment is needed at the end of the period to reconcile actual manufacturing overhead incurred and applied manufacturing overhead.
- Over-applied means that we overestimated the manufacturing overhead cost and actually spent less money.
- Under-applied means that we underestimated the manufacturing overhead and actually spent more money.
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Example: Over- or Under-Applying Manufacturing Overhead
ABC Inc. estimates that it will spend $1,000,000 on manufacturing overhead during 2020. It applies overhead on the basis of Direct Labour Cost. It expects to spend $500,000 on direct labour in 2020. The company pays its workers $35 per hour. At the end of the year, a total of 13,000 direct labour hours had been worked and manufacturing overhead incurred totalled $987,500.
Was overhead over-applied or under-applied and by how much?
Practice: Over- or Under-Applying Manufacturing Overhead
Wize Corp. estimated that manufacturing overhead will total $2,000,000 during 2022. The company applies overhead on the basis of labor hours and expects to use a total of 20,000 labor hours during 2022.
On December 31st, 2022 the company's records indicated that employees had worked a total of 23,578 hours during the year and an analysis of the company's invoices indicates that the total cost of manufacturing overhead during 2022 was $2,500,000.
Was overhead over-applied or under-applied?