What Is Overapplied Overhead and How Does It Impact Your Business?

Overapplied overhead is an accounting term used to describe the costs incurred beyond what was originally budgeted for. It is the difference between actual overhead costs and the budgeted amount. It occurs when the budgeted amount is higher than the actual costs incurred. Overapplied overhead can have a significant impact on a business and the way it is managed.

What Causes Overapplied Overhead?

Overapplied overhead can occur for a variety of reasons. One of the most common causes is when the budgeted amount for overhead is too high. This can happen when the budget is not properly prepared or when the budget does not accurately reflect the actual costs of running the business. It can also happen when the actual costs are higher than expected due to unexpected expenses or changes in the cost of materials.

What Are the Effects of Overapplied Overhead?

The effects of overapplied overhead can be significant. The most immediate effect is that the business is not able to use the funds that have been budgeted for overhead expenses. This can lead to a cash flow problem, as the funds are not available to pay for other expenses. The other major effect is that the costs of the business are higher than expected. This can lead to reduced profits and can even cause the business to fail.

How to Avoid Overapplied Overhead?

The best way to avoid overapplied overhead is to have a detailed and accurate budget. This should include all overhead costs, as well as any potential changes that could occur. It should also include a contingency plan in case the budget is exceeded. Finally, it should be reviewed and updated regularly to ensure that it accurately reflects the actual costs of running the business.

What Can Be Done if Overapplied Overhead Occurs?

If overapplied overhead does occur, the first step is to identify the cause. Once this is done, the business can take steps to reduce costs and to adjust the budget accordingly. It may also be necessary to identify areas where savings can be made and to reallocate funds to make up for any overspending.

Conclusion

Overapplied overhead can have a significant impact on a business. It can lead to cash flow problems, reduced profits, and even failure. To avoid this, businesses should have an accurate and detailed budget and should review and update it regularly. If overapplied overhead does occur, the business should identify the cause and take steps to reduce costs and adjust the budget accordingly.