How to use the over and under applied overhead calculator
- Enter the estimated overhead for the year and the estimated allocation base, such as direct labor hours.
- Enter the actual base used and the actual overhead incurred.
- Choose to close the variance to cost of goods sold, or to prorate it across work in process, finished goods and cost of goods sold, and enter those balances.
- Read the predetermined rate, the overhead applied, and whether it was over or under applied.
Formula
predetermined rate = estimated overhead / estimated base
applied overhead = rate x actual base
variance = applied overhead - actual overhead (positive is over applied)
prorated share = account balance / total of the balances x variance
Over applied means production was charged more overhead than the business really spent. Under applied means it was charged too little. The cents of a proration are placed with the largest remainder method so the shares add up to the variance exactly.
An hours-based rate
Estimated overhead is $400,000 on an estimated 20,000 direct labor hours, so the predetermined rate is $20 an hour. Actual hours were 21,000, so $420,000 was applied. Actual overhead was $435,000, so overhead was under applied by $15,000.
If you prorate across work in process of $100,000, finished goods of $150,000 and cost of goods sold of $750,000, the shares are 10%, 15% and 75%. The adjustments are $1,500, $2,250 and $11,250, which add up to the $15,000. With actual overhead of $408,000 instead, the overhead is over applied by $12,000 and the accounts are reduced instead.
Why overhead is applied at all
Actual overhead is not known until the year ends, but products must be costed as they are made. A predetermined rate gives an estimate during the year, and the difference at the end is the variance. The Overhead Rate Calculator helps set the rate in the first place.
The adjusted figure flows into the Cost of Goods Manufactured Calculator and the COGS Calculator.
Closing the variance
A small variance is usually closed to cost of goods sold. A large one is spread over the accounts that still hold applied overhead, so that inventory and cost of sales are not misstated. Which method fits depends on your policy and on how big the amount is.
Assumptions and limits
- One overhead pool and one allocation base are used.
- The ending balances you enter hold the applied overhead being adjusted.
- Proration uses the balances as the weights, rounded with the largest remainder method.
- Tax effects, standard costing and several overhead pools are not modeled.
- The result is arithmetic for planning and study, not accounting advice.
Frequently asked questions
What does over applied mean?
More overhead was charged to products than was actually spent. The extra is taken back out when the variance is closed.
Which allocation base should I use?
Choose the driver that best explains why overhead is incurred, such as direct labor hours or machine hours, and use the same one for the estimate and the actual.
Can the variance be zero?
It is rare, but the tool reports it as exactly applied when the applied and actual amounts match to the cent.
Why does the proration table need three balances?
Applied overhead sits in work in process, finished goods and cost of goods sold at the end of the year, so the variance is spread over those three accounts.