Overapplied overhead occurs when the total amount of factory overhead costs assigned to produced units constitutes more overhead than was actually incurred in the period. This usually happens when a business uses a standard long-term overhead rate that is based on an estimate of the average amount of factory overhead that a business is likely to incur, and the average number of units produced. In some periods, either the number of units produced will be greater than expected, or actual factory overhead costs will be lower than expected. In these situations, the use of a standard overhead rate will result in overapplied overhead.
Over the long-term, the use of a standard overhead rate should result in some months in which overhead is overapplied, and some months in which it is underapplied. On average, however, the amount of overhead applied should approximately match the actual amount of overhead incurred.