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.
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.
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.
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.