Final answer:
Overhead is overapplied when the actual overhead incurred is greater than the overhead applied, and underapplied when the actual overhead incurred is less than the overhead applied.
Step-by-step explanation:
The amount that overhead is overapplied or underapplied can be calculated by comparing the actual overhead incurred with the overhead applied to production. Overhead is typically applied to production based on a predetermined rate, such as a percentage of direct labor costs or machine hours. If the actual overhead incurred is greater than the overhead applied, then overhead is overapplied. Conversely, if the actual overhead incurred is less than the overhead applied, then overhead is underapplied.
For example, if a company applies overhead at a rate of 150% of direct labor costs and the actual overhead incurred is $10,000 while the overhead applied is $12,000, then the overhead is overapplied by $2,000. On the other hand, if the actual overhead incurred is $12,000 while the overhead applied is $10,000, then the overhead is underapplied by $2,000.