Applied Overhead Calculator
This tool calculates the amount of manufacturing overhead applied to production or jobs during an accounting period. Applied overhead is calculated using a predetermined overhead rate based on an estimated activity base.
Enter the Predetermined Overhead Rate and the Actual Activity Level for the period.
Enter Overhead Details
Understanding Applied Overhead & Formulas
What is Applied Overhead?
Applied Overhead is the amount of manufacturing overhead cost assigned to products or jobs using a predetermined rate. Unlike actual overhead costs (like actual rent, utilities, indirect labor), which are known only at the end of the period, applied overhead is calculated throughout the period as production occurs.
Why Use Applied Overhead?
Companies use applied overhead to:
- Allocate indirect costs to products in a systematic way.
- Determine product costs before the end of the accounting period.
- Value inventory (Work-in-Process, Finished Goods) for financial reporting.
- Help in decision-making and pricing.
Predetermined Overhead Rate
The Predetermined Overhead Rate (POR) is calculated before the accounting period begins using estimates:
POR = Estimated Total Manufacturing Overhead Cost / Estimated Total Amount of the Allocation Base
Common allocation bases include machine hours, direct labor hours, direct labor cost, or units produced.
The Applied Overhead Formula
The formula for calculating applied overhead during the period is straightforward:
Applied Overhead = Predetermined Overhead Rate × Actual Amount of the Allocation Base
This calculator uses this formula based on the Rate and Actual Level you provide.
Applied Overhead Examples
Click on an example to see a step-by-step calculation:
Example 1: Machine Hours Base
Scenario: A company uses machine hours to allocate overhead. The POR is $5 per machine hour.
1. Known Values: Predetermined Overhead Rate = $5/machine hour, Actual Machine Hours = 10,000 hours.
2. Formula: Applied Overhead = POR × Actual Activity Level
3. Calculation: Applied Overhead = $5/hour × 10,000 hours
4. Result: Applied Overhead = $50,000.
Conclusion: $50,000 of overhead is applied to production.
Example 2: Direct Labor Hours Base
Scenario: Overhead is applied based on direct labor hours. The POR is $12 per direct labor hour.
1. Known Values: Predetermined Overhead Rate = $12/DLH, Actual Direct Labor Hours = 4,500 hours.
2. Formula: Applied Overhead = POR × Actual Activity Level
3. Calculation: Applied Overhead = $12/DLH × 4,500 DLH
4. Result: Applied Overhead = $54,000.
Conclusion: $54,000 in overhead is applied.
Example 3: Direct Labor Cost Base
Scenario: Overhead is applied at 150% of direct labor cost. The POR is 1.5 (or 150%).
1. Known Values: Predetermined Overhead Rate = 150% (or 1.5), Actual Direct Labor Cost = $80,000.
2. Formula: Applied Overhead = POR × Actual Activity Level
3. Calculation: Applied Overhead = 1.5 × $80,000
4. Result: Applied Overhead = $120,000.
Conclusion: $120,000 of overhead is applied based on labor cost.
Example 4: Units Produced Base
Scenario: A simple rate per unit is used. The POR is $2.50 per unit.
1. Known Values: Predetermined Overhead Rate = $2.50/unit, Actual Units Produced = 25,000 units.
2. Formula: Applied Overhead = POR × Actual Activity Level
3. Calculation: Applied Overhead = $2.50/unit × 25,000 units
4. Result: Applied Overhead = $62,500.
Conclusion: $62,500 in overhead is applied based on the number of units.
Example 5: Departmental Rate
Scenario: Department A uses a machine hour rate. The POR for Dept A is $8 per machine hour.
1. Known Values: Predetermined Overhead Rate (Dept A) = $8/machine hour, Actual Machine Hours (Dept A) = 3,500 hours.
2. Formula: Applied Overhead = POR × Actual Activity Level
3. Calculation: Applied Overhead = $8/hour × 3,500 hours
4. Result: Applied Overhead = $28,000.
Conclusion: $28,000 of Department A's overhead is applied.
Example 6: Partial Period Calculation
Scenario: Calculating applied overhead for a single month in a company using a DLH rate. The POR is $15/DLH.
1. Known Values: Predetermined Overhead Rate = $15/DLH, Actual Direct Labor Hours for the month = 1,800 hours.
2. Formula: Applied Overhead = POR × Actual Activity Level
3. Calculation: Applied Overhead = $15/DLH × 1,800 DLH
4. Result: Applied Overhead = $27,000.
Conclusion: $27,000 in overhead is applied for that month.
Example 7: Job Costing Application
Scenario: A specific job used 50 direct labor hours. The company-wide POR is $10 per direct labor hour.
1. Known Values: Predetermined Overhead Rate = $10/DLH, Actual Direct Labor Hours for this job = 50 hours.
2. Formula: Applied Overhead = POR × Actual Activity Level
3. Calculation: Applied Overhead = $10/DLH × 50 DLH
4. Result: Applied Overhead = $500.
Conclusion: $500 of overhead is applied to this specific job.
Example 8: Using a Decimal Rate
Scenario: Overhead is applied at $3.75 per machine hour. Actual machine hours were 6,200.
1. Known Values: Predetermined Overhead Rate = $3.75/machine hour, Actual Machine Hours = 6,200 hours.
2. Formula: Applied Overhead = POR × Actual Activity Level
3. Calculation: Applied Overhead = $3.75/hour × 6,200 hours
4. Result: Applied Overhead = $23,250.
Conclusion: $23,250 in overhead is applied.
Example 9: High Activity Level
Scenario: A large factory uses direct labor hours. The POR is $9.50 per direct labor hour. Actual hours were 150,000.
1. Known Values: Predetermined Overhead Rate = $9.50/DLH, Actual Direct Labor Hours = 150,000 hours.
2. Formula: Applied Overhead = POR × Actual Activity Level
3. Calculation: Applied Overhead = $9.50/DLH × 150,000 DLH
4. Result: Applied Overhead = $1,425,000.
Conclusion: A large amount of overhead ($1.425 million) is applied.
Example 10: Rate based on Percentage of Material Cost
Scenario: Overhead is applied at 50% of direct material cost. The POR is 0.5 (or 50%). Actual Direct Material Cost was $40,000.
1. Known Values: Predetermined Overhead Rate = 50% (or 0.5), Actual Direct Material Cost = $40,000.
2. Formula: Applied Overhead = POR × Actual Activity Level
3. Calculation: Applied Overhead = 0.5 × $40,000
4. Result: Applied Overhead = $20,000.
Conclusion: $20,000 of overhead is applied based on material cost.
Frequently Asked Questions about Applied Overhead
1. What is the formula for Applied Overhead?
Applied Overhead is calculated by multiplying the Predetermined Overhead Rate by the Actual Activity Level (or actual amount of the allocation base).
2. What is a Predetermined Overhead Rate (POR)?
The POR is a rate calculated *before* the period begins using estimated total overhead costs and estimated total activity level. It's used to apply overhead to jobs or products throughout the period.
3. Why is a predetermined rate used instead of actual overhead?
Actual overhead costs aren't known until the end of the period. Using a predetermined rate allows companies to cost jobs/products and value inventory as production happens, providing timelier information.
4. What is the 'Actual Activity Level'?
This is the actual amount of the chosen allocation base incurred during the period or for a specific job. Examples include actual machine hours worked, actual direct labor hours worked, or actual direct labor cost incurred.
5. What are common activity bases?
Common bases include machine hours, direct labor hours, direct labor cost, direct material cost, or even units produced (in simple cases).
6. Is Applied Overhead the same as Actual Overhead?
Rarely. Applied Overhead is based on *estimated* costs and a *predetermined* rate applied to *actual* activity. Actual Overhead is the *actual* amount of costs incurred. The difference is called under-applied or over-applied overhead.
7. What does 'under-applied' or 'over-applied' overhead mean?
If Applied Overhead is less than Actual Overhead, overhead is "under-applied." If Applied Overhead is more than Actual Overhead, it's "over-applied." This difference is typically adjusted at the end of the accounting period.
8. Can the Predetermined Overhead Rate be a percentage?
Yes. When the allocation base is a dollar amount (like direct labor cost or direct material cost), the POR is often expressed as a percentage. For example, a rate of 150% of direct labor cost means $1.50 of overhead is applied for every $1 of direct labor cost.
9. What are the limitations of this calculator?
This calculator only performs the final step of applying overhead. It assumes you already have the Predetermined Overhead Rate. It doesn't calculate the POR itself, which requires estimated data.
10. What kind of businesses use applied overhead?
Businesses that use job costing (e.g., custom manufacturers, construction) or process costing (e.g., mass production industries) typically use applied overhead to determine product costs.
