This video summarizes the effects of overapplied or underapplied manufacturing overhead.

When a company has an underapplied overhead balance, this means it did not apply enough manufacturing overhead during the period. The company can dispose of the underapplied overhead balance by increasing Cost of Goods Sold or by increasing Work-in-Process Inventory, Finished Goods Inventory, and Cost of Goods Sold (the proration method). The latter approach would decrease Net Income and increase total assets.

When a company has an overapplied overhead balance, this means it did not apply enough manufacturing overhead during the period. The company can dispose of the overapplied overhead balance by decreasing Cost of Goods Sold or by decreasing Work-in-Process Inventory, Finished Goods Inventory, and Cost of Goods Sold (the proration method). The latter approach would increase Net Income and decrease total assets.