Underapplied overhead occurs when an accounting record in the cost accounting method includes overhead costs that are assigned to a work-in-progress product does not reach the amount of the actual overhead costs. Underapplied overhead is reported as a prepaid expense on the company’s balance sheet and, at the end of the year, it is balanced by inputting a debit to cost of goods sold. 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.
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