Overhead Allocation
True or False
Overhead costs are directly traceable
➛ False
Overhead costs are indirect and cannot be directly traced.
POHR is calculated using estimates
➛ True
Applied overhead uses actual activity
➛ True
Overapplied overhead means too much cost was assigned
➛ True
Fill in the Blanks
1. Overhead refers to indirect costs
2. POHR = estimated overhead ÷ estimated activity
3. Applied overhead = POHR × actual activity
4. If applied > actual, overhead is overapplied
Calculation Practice
A company reports
Estimated overhead =
Estimated labor hours =
Actual labor hours =
Estimated labor hours =
Actual labor hours =
$90,000
30,000
8,000
30,000
8,000
➛ Calculate POHR
➛ Calculate applied overhead
Step 1
POHR
90,000 ÷ 30,000 = 3
POHR = $3 per labor hour
Step 2
Applied Overhead
8,000 × 3 = 24,000
Final Answers
POHR =
Applied Overhead =
Applied Overhead =
$3 per hour
$24,000
$24,000
Over/Under Application
Actual overhead =
Applied overhead =
Applied overhead =
$25,000
$28,000
$28,000
➛ Is overhead overapplied or underapplied?
➛ By how much?
➛ What is the adjustment entry?
1. Is overhead overapplied or underapplied?
➛ Overapplied
➛ Overapplied
2. By how much?
28,000 − 25,000 = 3,000
➛ $3,000 overapplied
28,000 − 25,000 = 3,000
➛ $3,000 overapplied
3. Adjustment Entry
Manufacturing Overhead
Cost of Goods Sold
Cost of Goods Sold
Dr 3,000
Cr 3,000
Cr 3,000
Mini Case Study
A manufacturing company uses machine hours to allocate overhead. At year-end, actual overhead differs from applied overhead.
Questions
Why is overhead allocated using estimates?
➛ Because actual overhead is not known until the end of the period.
What causes over/under-applied overhead?
➛ Differences between estimated and actual costs
➛ Incorrect activity level estimates
➛ Unexpected expenses
How should the difference be treated?
➛ Adjusted in Cost of Goods Sold
Why is accurate allocation important?
➛ It ensures correct product costing, pricing, and profit measurement.
Quick Quiz
What is overhead allocation?
➛ Assigning indirect costs to products or jobs.
What is a POHR?
➛ A rate used to allocate overhead based on estimates.
How is applied overhead calculated?
➛ POHR × actual activity.
What is overapplied overhead?
➛ When applied overhead exceeds actual overhead.
Name one allocation base
➛ Labor hours
➛ Machine hours
➛ Units produced.
Cost-Volume-Profit Analysis ➧ Here