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6 May, 2015 - 17:10

Factory overhead consists of all manufacturing costs other than direct materials and direct labor. Factory overhead costs are both fixed and variable. The factory overhead controlling account is debited when costs are incurred and credited when factory overhead is "applied" (i.e. allocated) to various job orders. The overhead application rate can be based on either direct labor hours, direct labor cost or machine hours. Total credits rarely equal debits. A remaining credit indicates the overhead was underapplied (or underabsorbed), a debit indicates the overhead was overapplied. If this difference is small, it is closed to cost of goods sold. If it is large, it is allocated to the various inventory accounts.