when underapplied overhead appears on financial statements it is generally not considered a negative event rather analysts and interested managers look for patterns that may point to changes in the business environment or economic cycle should unfavorable variance or outcomes arise because not enough product was produced to absorb all overhead costs incurred managers will first look for viable reasons these may be explained by expected hiccups in production business or seasonal variation 
the initial predetermined overhead cost rate is calculated by taking the budgeted overhead costs divided by the budgeted activity special considerationsanalyzing underapplied overhead takes on greater significance for certain businesses such as manufacturing often as part of standard financial planning and analysis fp a activities careful review on underapplied overhead can point to meaningful changes in operational and financial conditions these can be useful in assessing capital budgeting decisions and the allocation of limited resources from time money and human capital advancements in electronic inventory and production management systems have greatly eased the burden of comprehensive operational reporting often including underapplied overhead analysis these improvements allow managers to better assess key operational metrics underapplied overhead vs overapplied overheadunderapplied overhead is the opposite of overapplied overhead overapplied overhead occurs when expenses incurred are actually less than what a company accounts for in its budget this means that a company comes in under budget and achieves a lower amount of overhead costs during the accounting period businesses must account for overapplied overheads as well this is recorded in the opposite manner that underapplied overhead is on the balance sheet first noted as a credit to the overhead section which is then offset by a credit on the cogs section and debit on the overhead section by the end of the fiscal year 