Management Accounting Over or Under Application

Question: Discuss how overheads can be over  or under applied and how the company should deal with the over  or under application ? Answer: Overhead is a term in accounting which deals with the various ongoing business expenses excluding all the others related to direct labor or the raw materials involved and the expenses that are billed to the customers by a third party. Irrespective of the fact that whether a company is doing well or not, the management needs to ensure that it is paying the overhead in order to keep the business running. Taking the overhead into consideration is not only required for creating an appropriate budget for the company but at the same time it also aids the company in understanding the amount it needs to charge in order to cater the products and services offered by it (Droms Wright, 2010). The overheads can be variable and thus increase or decrease on the basis of the activity level of the business organization. The over applied overhead or under applied manufacturing overhead can be defined as the difference that exists between the applied overhead cost of manufacturing for a particular spa n of time and the actual overhead cost manufacturing incurred by the company during that period of time. In the case when the applied cost of overhead is of a greater amount than the manufacturing overhead, it is defined as over applied manufacturing overhead. And when the applied overhead is below the actual overhead it is known as the under applied manufacturing overhead (Maher, Stickney, Weil, 2012). The management calculates the applied overhead on the basis of a predetermined overhead rate and thus there is the occurrence of over and under applied overhead is very much normal in the industry of manufacturing. Along with this there are many other factors for which cases of over and under applied overheads occur in the manufacturing business. A worker is paid a sum of money per hour to give an expected output. If the worker delivers more output then the company will face over applied overhead and if the worker is not able to deliver the expected output then it would result in an under applied overhead. In order to stop the occurrence of over or under application of overheads, the management of the organization needs to conduct thorough research about the needs, requirements, potential of the organization (Weygandt, Kimmel, Kieso, 2012). It is only through the gathering of the accurate and specific information via detailed research work that the management can ensure that over and under applied overheads do not take place. References Droms, W. Wright, J. (2010).Finance and accounting for nonfinancial managers. New York: Basic Books. Maher, M., Stickney, C., Weil, R. (2012).Managerial accounting. Mason, Ohio: South-Western Cengage learning. Weygandt, J., Kimmel, P., Kieso, D. (2012).Accounting principles. Hoboken, N.J.: Wiley.