When actual overhead is less than applied overhead, how is the accuracy of job costing perceived?

When actual overhead is less than applied overhead, it indicates that the amount of overhead costs that were estimated and allocated to jobs (applied overhead) exceeded the actual costs incurred. In managerial accounting, overhead costs are often applied based on a predetermined rate, which is an estimation based on expected activity levels, such as hours worked or machine hours used.

As a result, when this applied overhead is greater than what was actually spent, it suggests that jobs are being overcosted. This overcosting can lead to distorted financial reporting and decision-making, as the costs attributed to the jobs do not reflect the true expenses incurred. It highlights a misalignment between estimated and actual costs, resulting in an inflated cost for the jobs.

Recognizing this discrepancy is essential for managers as it may prompt a reassessment of the overhead rate or adjustments in future job costing to more closely align estimates with actual performance.