Learn how to Dispose off the manufacturing overheads in your accounting books

1. Dispose off those
Overheads!

2. What are overheads?
 Manufacturing Overhead is the
indirect factory related cost
incurred by a manufacturer at
the time of production. It is also
called factory overhead, factory
manufacturing cost.

3. What does overheads
include?
 Manufacturing overheads
include those costs which are
directly related to factory
equipment such as
depreciation of factory
equipment, factory supplies
and overheads, factory
personnel etc.

4. The General Accepted Accounting
Principle mandates that overheads
must be included in the cost of Work
in Progress and Finished Goods. In
work in progress account, the
overheads have to be debited on
applied basis.
The work in progress account does not
consider actual manufacturing overhead
incurred. Disposing off over and under
applied overheads is a must because it
considers the effect of difference between
the actual and applied overheads.

5. 1. Overheads are estimated on the basis of predetermined
overhead rates.
2. The overheads applied to work in progress and actual
manufacturing overhead incurred always maintains a
difference between them. This difference is what is called
Overhead Over-Applied or Under-applied manufacturing
overhead.

6. Overhead Over-Applied
Over applied manufacturing overhead is the
situation where actual manufacturing overhead is
less than overheads applied to the production.
Under-Applied Overhead
When applied overheads are less than the actual
overheads incurred, the term is referred to as
Under-applied manufacturing overhead.

7. Now, let us come to the original
question that was how to dispose
off under-applied or over-applied
overhead?

8. There are two methods of disposing over
applied and under applied overhead:
•Cost of Goods Sold Method
•Allocating Cost between Work in Progress and Finished
Goods

9. Reasons for Over & Under Applied
Overheads
•The main reason for occurrence of over & under applied
overheads is the method of applying overheads to jobs by using
predetermined overhead rate.
•Predetermined overhead rate is assumed to be same as actual
cost whereas in actual the two rates differ.
•There are 2 reasons of difference:
a) Overhead includes fixed part which does not vary with the
machine hours or direct labor hours.
b) O erheads may or may not be under control.

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