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Applied Overhead

Updated on January 3, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What is Applied Overhead?

Applied overheads are the indirect cost directly linked to the production of goods but cannot be charged specifically to any of the cost objects. The company charges or applies such overhead costs to its various departments or cost objects at a specific rate. At the same time, they are calculating the cost of goods sold for the period.

Explanation

In the company, certain costs such as rent, insurance premium, salary to administrative staff, etc., are part of itsProduction 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 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 specific product or service. To allocate the costs properly, management has to apply these costs toA cost object is a method that measures product, segment, and customer cost separately to determine the exact cost and selling price. read more 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

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Example

Let’s take the example of a company named Clothy Incorporation, which deals with manufacturing clothes. Suppose the company uses 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 150 hours of labor are used in one job and 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 based on 150 labor hours, which comes to $2,142.86.

Importance

Importance of Applied Overhead

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Benefits

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