ECONOMICS

Detailed explanation-1: -Overapplied overhead occurs when the total amount of factory overhead costs assigned to produced units is more than was actually incurred in the period.

Detailed explanation-2: -When the actual amount of overhead expenses exceeds the applied amount of overhead expenses, the difference is called underapplied overhead. The predetermined rate underestimated the overhead costs for the period, and the applied overhead expenses were lower than the actual overhead expenses.

Detailed explanation-3: -If manufacturing overhead has a debit balance, the overhead is underapplied, and the resulting amount in cost of goods sold is understated. The adjusting entry is: If manufacturing overhead has a credit balance, the overhead is overapplied, and the resulting amount in cost of goods sold is overstated.

Detailed explanation-4: -The overhead account is debited for the actual overhead costs as incurred. The overhead account is credited for the overhead costs applied to production in the work-in-process account.

Detailed explanation-5: -By analyzing how much it costs in overhead for every hour the machine is producing the company’s goods, management can properly price the product to make sure there’s enough profit margin to compensate for its indirect costs.