Let's analyze the question step-by-step to understand what it means if overhead is overapplied to the Work in Process Inventory at the end of the year:
1. Understanding Overhead Application:
Overhead refers to the indirect costs incurred during production but not directly attributable to a specific product. Companies estimate overhead costs and allocate them to products based on a predetermined rate.
2. Definitions of Overhead Situations:
- Overapplied Overhead: This occurs when the overhead costs assigned to Work in Process Inventory exceed the actual overhead incurred during the period.
- Underapplied Overhead: This happens when the overhead costs assigned are less than the actual overhead incurred.
3. Evaluating the Options:
- Option 1 (greater than estimated costs): This option mentions "estimated overhead costs." Overapplied overhead involves actual costs, not estimates, so this is not correct.
- Option 2 (less than estimated costs): Similar to option 1, this also focuses on estimated, not actual costs, making it incorrect.
- Option 3 (less than actual overhead): This describes underapplied overhead, not overapplied. So, this is not correct.
- Option 4 (greater than overhead incurred): This correctly addresses the situation where the overhead assigned exceeds the actual overhead costs incurred, which defines overapplied overhead.
Thus, the correct interpretation of overapplied overhead at year-end is represented by:
Option 4: The overhead assigned to Work in Process Inventory is greater than the overhead incurred.
