Underapplied Overhead
The term underapplied overhead refers to a situation that arises when overhead expenses amount to more than what a company actually budgets for in order to run its operations. Underapplied overhead is normally reported as a prepaid expense on a company's balance sheet and is balanced by inputting a debit to the cost of goods sold (COGS) section by the end of the year. Costs of goods sold are the direct cost associated with the production of goods sold by a company. The amount of underapplied overhead is referred to as an unfavorable variance.
Definition: Unallocated consumption refers to the situation when a company's actual indirect expenses exceed the budgeted amount. These expenses are usually reported as prepaid expenses on the company's balance sheet and balanced at the end of the year by debiting the cost of goods sold. The amount of unallocated consumption is referred to as an unfavorable variance.
Origin: The concept of unallocated consumption originates from cost control and budget management in corporate accounting and financial management. As companies grow and business operations become more complex, managing indirect expenses becomes increasingly important. The concept of unallocated consumption helps companies identify and manage these over-budget indirect expenses.
Categories and Characteristics: Unallocated consumption is mainly divided into two categories: fixed unallocated consumption and variable unallocated consumption. Fixed unallocated consumption refers to indirect expenses that do not change with production volume, such as rent and salaries of management personnel. Variable unallocated consumption refers to indirect expenses that vary with production volume, such as maintenance costs of production equipment. The characteristic of unallocated consumption is that it is usually difficult to directly allocate to specific products or services, so it needs to be apportioned through certain accounting treatments.
Specific Cases: Case 1: A manufacturing company budgeted indirect expenses of 1 million yuan for the year, but the actual expenditure was 1.2 million yuan. The excess 200,000 yuan is unallocated consumption, which needs to be balanced at the end of the year by debiting the cost of goods sold. Case 2: A retail company budgeted rent and management expenses of 500,000 yuan, but the actual expenditure was 600,000 yuan. The excess 100,000 yuan is unallocated consumption, which needs to be adjusted at the end of the year.
Common Questions: 1. Why does unallocated consumption occur? Unallocated consumption usually occurs due to inaccurate budgeting or actual expenditures exceeding expectations. 2. How to manage unallocated consumption? Companies can reduce the occurrence of unallocated consumption by strengthening budget management and cost control.
