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.

RELATED TERMS
  1. Overhead Rate

    In managerial accounting, a cost added on to the direct costs ...
  2. Applied Overhead

    A type of overhead that is recorded under the cost-accounting ...
  3. Variable Overhead Spending Variance

    The difference between actual variable overhead based on costs ...
  4. Production Volume Variance

    The amount of fixed overhead costs that are not allocated to ...
  5. Variable Overhead

    The indirect costs of operating a business that fluctuate somewhat ...
  6. Overhead

    An accounting term that refers to all ongoing business expenses ...
Related Articles
  1. Markets

    What's Overhead?

    Overhead is an accounting term used for expenses that have to be paid even if the business doesn’t earn any revenue. The business would not be able to operate without paying its overhead expenses, ...
  2. Investing

    What is Absorption Costing?

    Absorption costing is an accounting method primarily used in manufacturing. In absorption costing, the cost of a manufactured product includes the direct costs plus an apportioned share of the ...
  3. Investing

    Gross, Operating and Net Profit Margins

    A company’s income statement includes the company’s gross, operating and net profits.
  4. Markets

    Understanding Cost of Revenue

    The cost of revenue is the total costs a business incurs to manufacture and deliver a product or service.
  5. Markets

    What is the Breakeven Point?

    In general, when gains or revenue earned equals the money spent to earn the gains or revenue, you’ve hit the breakeven point.
  6. Entrepreneurship & Small Business

    What Are The Different Types Of Costs In Cost Accounting?

    Cost accounting measures several different types of costs associated with a company’s production processes.
  7. Markets

    Examining Costs Of Goods Sold (COGS)

    Learn more about the costs that go into production.
  8. Investing

    Explaining Prime Cost

    Prime cost is a way of measuring the total cost of the production inputs needed to create a given output.
  9. Markets

    Understanding Marginal Cost of Production

    Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit.
  10. Investing

    In The Week Ahead: Market Reaches Crucial Decision Point

    The major U.S. stock indices finished last week essentially unchanged, on the heels of back-to-back positive weeks, as the benchmark S&P 500 ran into a wall of formidable overhead resistance. ...
RELATED FAQS
  1. How does fixed overhead differ from varied overhead?

    Learn about overhead costs and the two types of overhead costs, and discover the difference between fixed and variable overhead ... Read Answer >>
  2. How do some contra account types reduce book value?

    Look at a brief example of how cost accounting treats overhead expenses, how those expenses are different from direct labor ... Read Answer >>
  3. How does quantifying fixed overhead volume variance show whether a company is profitable ...

    Find out why some fundamental analysts look at fixed overhead volume variance as an indicator of company profitability or ... Read Answer >>
  4. How is overhead distributed through total absorption costing?

    Learn how overhead is distributed through total absorption costing, and the steps required for a company to determine its ... Read Answer >>
  5. Does gross profit include labor and overhead costs?

    Find out how companies treat different kinds of labor costs when calculating gross profit and whether overhead costs impact ... Read Answer >>
  6. Why is overhead cost allocation sometimes manipulated on an income statement?

    Learn why companies sometimes manipulate overhead costs to boost the appearance of overall profitability, and other reasons ... Read Answer >>
Hot Definitions
  1. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  2. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  3. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  4. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  5. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  6. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
Trading Center