In a company where manufacturing overhead is applied based on machine hours, $2,600 of overhead has been applied, while actual overhead is $2,800. Is overhead underallocated or overallocated and by how much?

Answer: $200 Underallocated

Explanation: Overhead costs refers to expenses incurred by a business organization which are not directly related to operating expenses such as cost of labor, equipments or materials. Overhead cost may include rent, cost of repair, and advertisement.

Overallocation or underallocation of manufacturing overhead is the difference between the applied manufacturing overhead and the actual manufacturing overhead.

Overallocation occurs when applied manufacturing overhead cost is greater than the actual manufacturing overhead incurred during a certain period.

Underallocation occurs when applied manufacturing overhead is less than the actual manufacturing overhead cost over a certain period.

In the exercise above,

Applied overhead - actual overhead

$2600 - $2800 = - $200

Overhead = $200 Underallocated,

Applied manufacturing overhead is less than the actual manufacturing overhead cost.