What is underapplied factory overhead?

Underapplied factory overhead occurs when the actual overhead costs incurred during a production period exceed the overhead costs that were applied to products based on a predetermined overhead rate. This situation indicates that the manufacturing costs were underestimated, leading to potential financial discrepancies. As a result, businesses may need to adjust their pricing or production strategies to account for the additional costs. Properly managing and analyzing overhead is essential for accurate financial reporting and effective cost control.