What is Overapplied (Over-absorbed) Factory Overhead Rate?

Overapplied factory overhead, also known as over-absorbed factory overhead, refers to a situation where the actual overhead costs incurred during a specific accounting period are less than the amount allocated or applied to products or cost objects using the predetermined factory overhead rate. In other words, it represents an overallocation of overhead costs to the products or jobs.

Overapplied factory overhead occurs when the estimated overhead costs used in the predetermined rate calculation are higher than the actual overhead costs incurred. This can happen due to various reasons, such as a decrease in the actual level of activity, changes in cost drivers, or inaccurate estimates used in the predetermined rate calculation.

The overapplied factory overhead is considered as a variance and is typically recorded in the accounting records through an adjusting entry at the end of the accounting period. The entry would debit the Factory Overhead Control account and credit Cost of Goods Sold (or an equivalent expense account). By doing so, the overapplied overhead cost is recognized as a reduction in expenses in the period in which it occurred.

Overapplied factory overhead represents a surplus of allocated costs that were not actually incurred during the period. It can impact the accuracy of product costs and may result in distorted profitability analysis. Therefore, it’s important for companies to monitor and analyze the overapplied overhead variances, identify the reasons behind the deviation, and take appropriate corrective actions to address the issue.

Conversely, if the actual overhead costs incurred exceed the allocated overhead costs, it is referred to as underapplied factory overhead. In such cases, the underapplied overhead is typically adjusted by making a journal entry that debits Cost of Goods Sold (or equivalent) and credits the Factory Overhead Control account, recognizing the underapplied amount as an expense in the period.

Caroline Grimm

Caroline Grimm is an accounting educator and a small business enthusiast. She holds Masters and Bachelor degrees in Business Administration. She is the author of 13 books and the creator of Accounting How To YouTube channel and blog. For more information visit: https://accountinghowto.com/about/

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