Cornerstones of Managerial Accounting Study Set 5

Answer:

There are two types of overhead:
Actual overhead : Costs are tracked throughout the year in the overhead account.
Applied overhead: Costs are computed throughout the year and added to actual direct materials and actual direct labor to get total product cost
If actual overhead is less than applied overhead, then the variance is called over-applied overhead.
When Cost of Goods Sold is adjusted for over-applied overhead, the cost will decrease because the over-applied overhead is subtracted from Cost of Goods Sold.
The over-applied overhead is deducted from the cost of Goods sold because the applied overhead, which was predetermined, was more than the actual overhead. However, at year-end, cost reported on the financial statements must be actual amounts. Thus, the over-applied overhead is deducted from Cost of Goods Sold.