Applied Overheads
Applied Overheads?
Applied overheads are costs that cannot be directly assigned to the cost object.
![ap 1](https://seeaccountingnow.online/wp-content/uploads/2021/08/ap-1.jpg)
How it Works
A manufacturer may have a client who is interested in buying a product.
![ap 2](https://seeaccountingnow.online/wp-content/uploads/2021/08/ap-2.jpg)
The manufacturer will need to work out a quote for the client.
![ap 3](https://seeaccountingnow.online/wp-content/uploads/2021/08/ap-3.jpg)
To do this, the manufacturer will need to estimate the costs involved.
![ap 4](https://seeaccountingnow.online/wp-content/uploads/2021/08/ap-4.jpg)
In the end, the quote will include an estimate of the likely material costs.
![ap 5](https://seeaccountingnow.online/wp-content/uploads/2021/08/ap-5.jpg)
It will also include direct labor costs.
![ap 6](https://seeaccountingnow.online/wp-content/uploads/2021/08/ap-6.jpg)
Finally, it will include manufacturing overheads.
![ap 7](https://seeaccountingnow.online/wp-content/uploads/2021/08/ap-7.jpg)
From these estimates, the manufacture will determine a unit cost price.
![ap 8](https://seeaccountingnow.online/wp-content/uploads/2021/08/ap-8.jpg)
Based on this, they will come up with a quote.
![ap 9](https://seeaccountingnow.online/wp-content/uploads/2021/08/ap-9.jpg)
If the client agrees to the quote, the manufacturer will go ahead and make the product.
![ap 10](https://seeaccountingnow.online/wp-content/uploads/2021/08/ap-10.jpg)
Applied Overheads
Applied overheads are costs that are applied to a cost object—as opposed to using actual costs.
![ap 11](https://seeaccountingnow.online/wp-content/uploads/2021/08/ap-11.jpg)
For example, to determine manufacturing overheads, you could calculate the amount of rent, insurance, administration costs etc used in the production of the product.
![ap 12](https://seeaccountingnow.online/wp-content/uploads/2021/08/ap-12.jpg)
Problem is, this process requires a large amount of time and resources.
![ap 13](https://seeaccountingnow.online/wp-content/uploads/2021/08/ap-13.jpg)
A quicker and easier option is to assign an applied cost.
![ap 14](https://seeaccountingnow.online/wp-content/uploads/2021/08/ap-14.jpg)
For example, you could use a cost based on the number of machine hours required to produce the product.
![ap 15](https://seeaccountingnow.online/wp-content/uploads/2021/08/ap-15.jpg)
Alternatively, you may base it on the number of employee hours necessary.
![ap 16](https://seeaccountingnow.online/wp-content/uploads/2021/08/ap-16.jpg)
Calculating Applied Overheads
Applied overheads are a factory-wide costing, determined from the company’s records.
![ap 17](https://seeaccountingnow.online/wp-content/uploads/2021/08/ap-17.jpg)
Once determined—you apply them to future costings as the need arises.
![ap 18](https://seeaccountingnow.online/wp-content/uploads/2021/08/ap-18.jpg)
To calculate applied overheads, you find total cost of overheads for the entire factory for a period.
![ap 19](https://seeaccountingnow.online/wp-content/uploads/2021/08/ap-19.jpg)
Then you divide this by the total number of machine hours used for the period.
![ap 20](https://seeaccountingnow.online/wp-content/uploads/2021/08/ap-20.jpg)
This gives a factory-wide rate for indirect overheads of so much per machine hour used.
![ap 21](https://seeaccountingnow.online/wp-content/uploads/2021/08/ap-21.jpg)
Applying Predetermined Overheads
To apply the overheads, you estimate how many machine hours it will take to make the goods.
![ap 22](https://seeaccountingnow.online/wp-content/uploads/2021/08/ap-22.jpg)
Then you multiply this by the calculated rate per machine hour.
![ap 23](https://seeaccountingnow.online/wp-content/uploads/2021/08/ap-23.jpg)
This will show the total applied overheads for the goods.
![ap 24](https://seeaccountingnow.online/wp-content/uploads/2021/08/ap-24.jpg)