Manufacturing Overhead Allocation Calculator
Use this tool to calculate the amount of manufacturing overhead allocated to a specific job, product, or service. This requires knowing your predetermined **Manufacturing Overhead Allocation Rate** (calculated in Step 2) and the amount of the allocation base consumed by the cost object.
Calculate Allocated Overhead for a Cost Object
Understanding Overhead Allocation
What is Allocated Overhead?
Allocated (or Applied) Manufacturing Overhead is the process of assigning indirect manufacturing costs (like factory rent, utilities, indirect labor) to specific products, jobs, or services. Since these costs cannot be directly traced to a single item, they are pooled together (Total Manufacturing Overhead - Step 1) and then spread across production using an **Overhead Allocation Rate** (calculated in Step 2).
Why Allocate Overhead?
Allocating overhead is crucial for:
- **Accurate Product Costing:** To determine the full cost of producing an item, which includes direct materials, direct labor, and a portion of manufacturing overhead.
- **Pricing Decisions:** Knowing the full cost helps companies set appropriate selling prices.
- **Inventory Valuation:** Accounting rules require that manufacturing overhead be included in the cost of inventory.
- **Decision Making:** Helps management understand the profitability of different products or jobs.
The Allocation Formula
The core formula used by this calculator is simple:
Allocated Manufacturing Overhead = Manufacturing Overhead Allocation Rate × Amount of Allocation Base used by Cost Object
For example, if your rate is $10 per machine hour, and a job used 5 machine hours, the allocated overhead is $10/hour * 5 hours = $50.
Common Allocation Bases
The choice of allocation base (cost driver) should ideally be something that causes or is highly correlated with the incurrence of overhead costs. Common bases include:
- Direct Labor Hours
- Direct Labor Cost
- Machine Hours
- Number of Units Produced
- Material Cost
This calculator works regardless of the specific base used, as long as you provide the rate *per unit of that base* and the corresponding *units used* by the cost object.
Overhead Allocation Examples
Here are 10 examples illustrating how to use the calculator:
Example 1: Job using Machine Hours
Scenario: Job #101 used machine time in a factory.
Inputs:
- Manufacturing Overhead Allocation Rate: $15.00 per machine hour (from Step 2)
- Amount of Allocation Base used by Job #101: 8 machine hours
Calculation: Allocated Overhead = $15.00/hour * 8 hours
Result: $120.00
Conclusion: $120 of manufacturing overhead is allocated to Job #101.
Example 2: Product using Direct Labor Hours
Scenario: A batch of Product X required manual labor.
Inputs:
- Manufacturing Overhead Allocation Rate: $20.00 per direct labor hour (from Step 2)
- Amount of Allocation Base used by Product X batch: 40 direct labor hours
Calculation: Allocated Overhead = $20.00/hour * 40 hours
Result: $800.00
Conclusion: $800 of manufacturing overhead is allocated to this batch of Product X.
Example 3: Job using Direct Labor Cost
Scenario: Job #102 had significant labor costs.
Inputs:
- Manufacturing Overhead Allocation Rate: 75% of direct labor cost (from Step 2)
- Amount of Allocation Base used by Job #102: $500 in direct labor cost
Calculation: Allocated Overhead = 75% * $500
Calculation (for calculator input): Rate = 0.75, Base Usage = 500. Allocated Overhead = 0.75 * 500
Result: $375.00
Conclusion: $375 of manufacturing overhead is allocated to Job #102.
Example 4: Item based on Units Produced
Scenario: A factory produces many identical small items.
Inputs:
- Manufacturing Overhead Allocation Rate: $2.50 per unit produced (from Step 2)
- Amount of Allocation Base used for 500 units: 500 units
Calculation: Allocated Overhead = $2.50/unit * 500 units
Result: $1,250.00
Conclusion: $1,250 of manufacturing overhead is allocated to this production run of 500 units.
Example 5: Job with High Machine Usage
Scenario: A large job required extensive machine time.
Inputs:
- Manufacturing Overhead Allocation Rate: $18.50 per machine hour
- Amount of Allocation Base used: 150 machine hours
Calculation: Allocated Overhead = $18.50/hour * 150 hours
Result: $2,775.00
Conclusion: $2,775 of manufacturing overhead is allocated to this job.
Example 6: Product with Low Labor Usage
Scenario: A highly automated product requires minimal direct labor.
Inputs:
- Manufacturing Overhead Allocation Rate: $22.00 per direct labor hour
- Amount of Allocation Base used: 5 direct labor hours
Calculation: Allocated Overhead = $22.00/hour * 5 hours
Result: $110.00
Conclusion: $110 of manufacturing overhead is allocated to this product batch.
Example 7: Job with Zero Base Usage
Scenario: A specific product or service somehow did not use the chosen allocation base (e.g., a design service in a factory that uses machine hours as the base).
Inputs:
- Manufacturing Overhead Allocation Rate: $10.00 per machine hour
- Amount of Allocation Base used: 0 machine hours
Calculation: Allocated Overhead = $10.00/hour * 0 hours
Result: $0.00
Conclusion: Zero manufacturing overhead is allocated if the cost object did not consume any of the allocation base.
Example 8: Job using Direct Labor Cost (Different Rate)
Scenario: Another job in the factory with different labor costs.
Inputs:
- Manufacturing Overhead Allocation Rate: 120% of direct labor cost
- Amount of Allocation Base used: $1,500 in direct labor cost
Calculation (for calculator input): Rate = 1.20, Base Usage = 1500. Allocated Overhead = 1.20 * 1500
Result: $1,800.00
Conclusion: $1,800 of manufacturing overhead is allocated to this job.
Example 9: Small Batch based on Units Produced
Scenario: A small custom order of items.
Inputs:
- Manufacturing Overhead Allocation Rate: $4.75 per unit produced
- Amount of Allocation Base used for 20 units: 20 units
Calculation: Allocated Overhead = $4.75/unit * 20 units
Result: $95.00
Conclusion: $95 of manufacturing overhead is allocated to this small batch.
Example 10: Job with Fractional Machine Hours
Scenario: A short job using a fraction of a machine hour.
Inputs:
- Manufacturing Overhead Allocation Rate: $30.00 per machine hour
- Amount of Allocation Base used: 0.75 machine hours
Calculation: Allocated Overhead = $30.00/hour * 0.75 hours
Result: $22.50
Conclusion: $22.50 of manufacturing overhead is allocated to this short job. Quantities can be fractional.
Frequently Asked Questions about Overhead Allocation
1. What is allocated (or applied) overhead?
It's the portion of total manufacturing overhead cost that is assigned to a specific product, job, or service using a predetermined allocation rate.
2. How is the Overhead Allocation Rate determined?
The rate is typically calculated at the beginning of an accounting period by dividing the estimated total manufacturing overhead costs (from Step 1) by the estimated total amount of the allocation base for that period (as done in Step 2).
3. Why do manufacturers allocate overhead?
To get a complete picture of the cost of producing a product or service, which is needed for pricing, inventory valuation, and profitability analysis. Overhead is a real cost of production, even if it's not directly traceable.
4. What is an allocation base?
It's a measure of activity that is used to distribute overhead costs to cost objects. It should ideally be a factor that drives or causes the overhead costs.
5. What are common types of allocation bases?
Examples include direct labor hours, direct labor cost, machine hours, number of units produced, and sometimes material cost or other activity measures.
6. What inputs does this calculator need?
It requires the Manufacturing Overhead Allocation Rate (e.g., $ per hour, % of cost) and the specific amount of the chosen allocation base used by the product or job you are costing.
7. What units should I use?
Ensure consistency. If your rate is $ per machine hour, the amount of base used must be in machine hours. If your rate is a percentage of direct labor cost, the amount of base used must be in direct labor cost dollars.
8. Can the allocation rate change?
Yes, the predetermined rate is typically calculated once a year or quarter based on estimates. It's then used consistently throughout that period. A new rate is calculated for the next period.
9. What is the difference between allocated (applied) overhead and actual overhead?
Allocated overhead is the amount assigned to products using the predetermined rate. Actual overhead is the total overhead costs actually incurred during the period. Differences between the two result in over- or under-applied overhead, which is adjusted at the end of the period.
10. How is allocated overhead used in product costing?
The allocated manufacturing overhead is added to the direct material costs and direct labor costs for a specific product or job to determine its total manufacturing cost.
