Pricing & margin
Underapplied Overhead
Formula reviewed by Tahir Asif, CMA
The amount by which actual overhead exceeds the overhead applied to production, leaving costs understated until the difference is closed.
Overhead is underapplied when actual overhead incurred is greater than the overhead applied with the predetermined rate. Production was charged too little, so product costs and inventory are understated. If applied overhead is greater than actual, it is overapplied.
A small difference is usually closed to cost of goods sold. A material difference is prorated among work in process, finished goods and cost of goods sold. A persistent difference suggests the rate or the activity estimate needs to change.
Calculate your own underapplied overhead instantly, free.
Open the calculator →Related terms