Applied Overhead

What is Applied Overhead?

Applied overheads are the indirect cost that is directly linked to the production of goods but cannot be charged specifically to any of the cost objects. Such overhead cost is charged or applied by the company to its various departments or cost objects at a specific rate. while calculating the cost of goods sold for the period.

Explanation

In the company, there are certain costs such as rent cost, insurance premium cost, salary to administrative staff, etc. which is part of its production costProduction CostProduction Cost is the total capital amount that a Company spends in producing finished goods or offering specific services. You can calculate it by adding Direct Material cost, Direct Labor Cost, & Manufacturing Overhead Cost. read more as they are incurred during production. Still, on the other hand, these costs cannot be traced back directly to any of the specific product or the service. To allocate the costs properly, management has to apply these costs to the cost objectsThe Cost ObjectsA cost object is a method that measures product, segment, and customer cost separately to determine the exact cost and selling price. read more properly and systematically based on certain standard methodology where these methodologies should be consistently followed from one period to another except in certain exceptional situations.

The formula is as follows –

Applied Overhead Formula = Estimated Amount of Overhead Costs / Estimated Activity of the Base Unit

Applied Overhead

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Where

Example

Let’s take the example of a company named Clothy Incorporation, which deals with manufacturing clothes. Suppose the company chooses to use the labor hours as the base of the applied cost allocationCost AllocationCost Allocation is the procedure of recognizing & assigning costs to different cost objects like a product, department, program, customer, etc., as per the cost driver serving as the base for this process. read more. The following are the details of the transactions by the company during the financial year 2019-20:

Applied Overhead Example 1

Suppose in one job 150 hours of labor is used, calculate the applied overheads for that job

Solution:

Applied Overhead Example 1-1

Calculation on the particular job given:

Applied Overhead Example 1-2

The applied overhead rate per hour is $ 14.29, and based on 150 labor hours, it comes to $2,142.86.

Importance

Importance of Applied Overhead

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Benefits

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