Question

2. Provide two reasons why overhead might be under-applied in a given year.

Answer 1

The method of applying overhead to jobs using a predetermined overhead rate assumes that actual overhead costs will be proportional to the actual amount of the allocation base incurred during the period.

Overhead is said to be under-applied when the actual manufacturing overhead incurred exceeds the overhead applied.

Two reasons why overhead might be under-applied in a given year:

a. Manufacturing inefficiencies resulting in actual overhead costs exceeding applied overhead costs.

b. The estimation of total manufacturing overhead costs at the beginning of the period was incorrect, i.e the amount was underestimated.