How to Calculate Applied Overhead Costs

by Carter McBride; Updated September 26, 2017

Overhead is a business's costs not related to direct inputs or administration. Applied overhead is the management's budgeted amount of overhead for a specified period of time. Managers use applied overhead mainly in cost and managerial accounting. By determining applied overhead costs, management can compare these costs with the actual costs incurred during the period. This is useful in finding problems associated with overhead application in a business. The formula is: applied overhead costs = budgeted annual rate x budgeted annual hours.

Step 1

Determine the budgeted annual rate. This is a management estimate expressed in terms of dollars per work hour. Management determines the budgeted annual rate based on prior period figures and any changes in production expected in the current period.

Step 2

Determine the budgeted annual activity hours which are also a management estimate. Management determines the budgeted annual activity hours by calculating how many hours they plan to run production.

Step 3

Multiply the budgeted overhead rate by the budgeted annual activity hours. For example, if a company estimated $100/work hour and 500 hours of work, then the applied overhead costs for the month equal $50,000 per hour of work.

About the Author

Carter McBride started writing in 2007 with CMBA's IP section. He has written for Bureau of National Affairs, Inc and various websites. He received a CALI Award for The Actual Impact of MasterCard's Initial Public Offering in 2008. McBride is an attorney with a Juris Doctor from Case Western Reserve University and a Master of Science in accounting from the University of Connecticut.

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