How to Calculate Underapplied Overhead

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Overhead analysis is a cost accounting concept. Overhead is an indirect cost of manufacturing. Underapplied overhead occurs when a company has overhead costs greater than its budgeted costs. Overapplied overhead, on the other hand, occurs when a company has overhead costs less than its budgeted costs. To determine applied overhead, the company needs to know its budgeted overhead and actual overhead. The difference shows if the overhead is under or over applied. Companies use overhead analysis to determine their efficiency during a period of controlling overhead costs.

  • Determine the budgeted overhead for the period. The budgeted overhead equals the actual hours worked times the predetermined overhead rate. Predetermined overhead rate is a company estimate, before the period begins, on how much overhead will cost per hour. For example, a business estimates it will pay $8 an hour of overhead. The business works 1,000 hours during the period. Therefore, budgeted overhead for the period equals $8,000 = $8 x 1,000 hours.

  • Determine the actual overhead costs. Actual overhead costs are found through company receipts for how much overhead costs. In an academic setting, problems from textbooks will often provide actual overhead costs per hour. If actual overhead costs per hour are given, then multiply those costs per hour by the number of hours worked. For example, the actual overhead rate for a company is $10 an hour, Therefore, actual overhead is $10,000 by the equation $10 x 1,000 hours.

  • Subtract the budgeted overhead costs from the actual overhead costs to determine the applied overhead. In our example, $10,000 minus $8,000 equals $2,000 of underapplied overhead.

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