What Is Applied Overhead?

Applied overhead is a type of direct overhead expense that is recorded under the 澳洲幸运5开奖号码历史查询:cost-accounting method. Applied overhead is a fixed rate charged to a specific production job, good produced, or department within a company. Companies use cost accounting to identify the expenses associated with man▨ufacturing.

It is a category of overhead that is traceable. Applied overhead stands in 🗹contrast to general overhead, which is an indirect overhead, such as utilities, salaries, or rent.

Understanding Applied Overhead

Overhead refers to the ongoing 澳洲幸运5开奖号码历史查询:business expenses not directly attributed to creating a product or service. It is important for budgeting purposes and determining how much a company must charge for its products or services to make a profit. In short, overhead is any expense in💯curred to support the busines♛s while not being directly related to a specific product or service.

Applied overhead is usually allocated out to various 澳洲幸运5开奖号码历史查询:departments according to a specific formula. Hence, a certain amount of overhead is therefore applied to a given department, such as 澳洲幸运5开奖号码历史查询:marketing. The ꦰpercentage of overhead that is applied to a given depar𝄹tment may or may not correlate to the actual amount of overhead incurred by that department.

Applied overhead costs include any cost that cannot be directly assigned to a cost object, such as rent, administrative staff compensation, and insurance. A cost object is an item for which a cost is compiled, such as a product, product line, 澳洲幸运5开奖号码历史查询:distribution channel, subsidiary, 💛process, geographic region, or customeಞr.

Overhead is generally allocated (or applied) to cost ite♕ms based on a standard methodology that is used consistently from one period to the next. For example:

• Factory overhead is applied to products based on their use of machine processing time.
• Corporate overhead is applied to subsidiaries based on the revenue, profit, or asset levels of the subsidiaries.

Example of Applied Overhead

For instance, a business may apply overhead to its products based on a standard overhead application rate of $35.75 per hour of machine & equipment time used. S🐟ince the total amount of machine-hours used in the accounting period was 7,200 hours, the company would apply $257,400 of overhead to the units produced in that period.

From a management perspective, the analysis of applied overhead (and 澳洲幸运5开奖号码历史查询:underapplied overhead) is an integral part of financial planning & analysis (FP&A) methods. By analyzing how costs are assigned to certain products or projects, management teams ca🎀n make better-informed capital budgeting and financial-related operations decisions. In turn, with better analytics, management can achieve better capital use efficiency and return on invested capital, thereby increasing bus💜iness valuation.