Month End Glossary

Under-Applied Overhead

Under-applied overhead refers to a situation in costing where the total manufacturing overhead costs assigned to production are less than the actual overhead costs incurred during a period.

Under-applied overhead occurs when the allocated manufacturing overhead costs, derived from a predetermined overhead rate applied to operations, are less than the actual overhead expenses recorded. Manufacturing companies use overhead allocation to estimate and assign indirect costs to products or production activities. Companies calculate a predetermined overhead rate before a period begins, often based on an expected level of production activity, such as direct labor hours. However, if actual activity deviates from this expectation or if actual costs are higher than anticipated, the applied overhead cost will fall short of the actual overhead incurred, leading to under-applied overhead. This is a notable issue because it can affect the accuracy of financial reporting and decision-making. For instance, if the company applies $10,000 of overhead during a period but incurs $12,000 in actual overhead costs, then $2,000 represents under-applied overhead. This under-applied amount usually requires an adjustment at the end of the period, where it is either added to the cost of goods sold (COGS) or allocated across inventory accounts, depending on the situation. Addressing under-applied overhead provides a clearer view of production profitability and helps managers make informed decisions.

Related Terms

Make your next Month End easy.
Start your free trial today.

Your first Month End free. We’ll import your existing checklist. It’s 2025 - time to get control of your Month End close process!