Underapplied Overhead


DEFINITION of 'Underapplied Overhead'

An accounting record in cost accounting where the overhead costs assigned for a work-in-progress product does not reach the amount of the actual overhead costs. Underapplied overhead is reported as a prepaid expense on the company's balance sheet and, at the end of the year, it is balanced by inputing a debit to cost of goods sold. Costs of goods sold is the direct cost associated with the production of goods sold by a company. The amount of underapplied overhead is referred to as an unfavorable variance.

BREAKING DOWN 'Underapplied Overhead'

For example, an overhead of $100,000 was incurred, but only $90,000 was applied. This is referred to as an unfavorable variance because it means that the budgeted costs were lower than actual costs and thus the cost of goods sold of the product were more than expected.

The initial predetermined overhead cost rate is calculated by taking the budgeted overhead costs divided by the budgeted activity.

  1. Variable Overhead Spending Variance

    The difference between actual variable overhead based on costs ...
  2. Applied Overhead

    A type of overhead that is recorded under the cost-accounting ...
  3. Overhead Rate

    In managerial accounting, a cost added on to the direct costs ...
  4. Absorption Costing

    A managerial accounting cost method of expensing all costs associated ...
  5. Overhead

    An accounting term that refers to all ongoing business expenses ...
  6. Accountant

    A professional who performs accounting functions such as audits ...
Related Articles
  1. Investing Basics

    Reading The Balance Sheet

    Learn about the components of the statement of financial position and how they relate to each other.
  2. Retirement

    The Essentials Of Corporate Cash Flow

    Tune out the accounting noise and see whether a company is generating the stuff it needs to sustain itself.
  3. Fundamental Analysis

    Dynamic Current Ratio: What It Is And How To Use It

    Learn why this ratio may be a good alternative to the current, cash and quick ratios.
  4. Markets

    Cash: Can A Company Have Too Much?

    Cash is something companies love to have. But if they are not using it there could be problems.
  5. Markets

    What Is A Cash Flow Statement?

    Learn how the CFS relates to the balance sheet and income statement as a part of a company's financial reports.
  6. Investing

    What a Family Tradition Taught Me About Investing

    We share some lessons from friends and family on saving money and planning for retirement.
  7. Professionals

    4 Must Watch Films and Documentaries for Accountants

    Learn how these must-watch movies for accountants teach about the importance of ethics in a world driven by greed and financial power.
  8. Active Trading

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  9. Markets

    Operating Cash Flow: Better Than Net Income?

    Differences between accrual accounting and cash flows show why net income is easier to manipulate.
  10. Investing Basics

    The Best Litmus Test Of A Company's Risk? The Acid Test

    The acid test measures a company’s short-term liquidity.
  1. Can working capital be depreciated?

    Working capital as current assets cannot be depreciated the way long-term, fixed assets are. In accounting, depreciation ... Read Full Answer >>
  2. Do working capital funds expire?

    While working capital funds do not expire, the working capital figure does change over time. This is because it is calculated ... Read Full Answer >>
  3. How much working capital does a small business need?

    The amount of working capital a small business needs to run smoothly depends largely on the type of business, its operating ... Read Full Answer >>
  4. What does high working capital say about a company's financial prospects?

    If a company has high working capital, it has more than enough liquid funds to meet its short-term obligations. Working capital, ... Read Full Answer >>
  5. How can working capital affect a company's finances?

    Working capital, or total current assets minus total current liabilities, can affect a company's longer-term investment effectiveness ... Read Full Answer >>
  6. What can working capital be used for?

    Working capital is used to cover all of a company's short-term expenses, including inventory, payments on short-term debt ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  4. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  5. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  6. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
Trading Center