Which type of overhead is used to determine the under or over-applied overhead?

The question focuses on understanding how overhead is applied and how it affects financial reporting, particularly in terms of over-applied or under-applied overhead.

Applied overhead is the overhead amount that has been allocated to products or services based on a predetermined overhead rate, which is calculated before the accounting period begins. This rate is often based on estimated costs and activity levels. By comparing the applied overhead to the actual overhead incurred during the period, companies can determine if they have over-applied or under-applied overhead.

When the applied overhead is greater than the actual overhead incurred, this results in over-applied overhead, indicating that more overhead was allocated to products than what was actually spent. Conversely, if the applied overhead is less than the actual overhead, this results in under-applied overhead, indicating that actual expenses exceeded what was allocated.

The other types of overhead listed—actual, normal, and variable—do not play the same direct role in determining the difference between overhead applied and overhead actually incurred. Actual overhead refers to the actual expenses incurred, while normal overhead relates to the typical or standard costs incurred during production. Variable overhead involves costs that fluctuate with production levels but does not specifically serve to measure the under or over-application of overhead. Therefore, applied