How does the temperature overlay work?
Solution 1:
Colors start as red being cold, and goes red->orange->yellow gradually.
As for temp gauges showing up in space, that's because parts still get hot in space and cool down very slowly. An option here is to use radiators to quickly remove the heat. Other parts such as RTG's and batteries also overheat quickly and easily.
Temp gauges can also show up before the overheat bars on the staging area. Engine overheat bars show up at different temperatures for different engines.