Explanation of Over and Underapplied Overhead

A state in which the overhead applied to a work in progress (WIP) product is less than the overhead that the work in progress (WIP) in reality incurs. In result the manufacturing overhead having a debit balance. Underapplied overhead is reported on the balance sheet as a prepaid expense. At the end of the year, underapplied overhead is balanced by making a debit to Cost of Goods Sold.