APPLIED OVERHEAD Meaning and
Definition
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Applied overhead refers to the indirect costs that are allocated to a specific cost object, such as a product or service, based on predetermined rates. These indirect costs are necessary for the production process but do not directly link to a specific unit of output. Applied overhead is used as a means to distribute and allocate these indirect costs to products or services based on a systematic approach, typically using a predetermined overhead rate.
To determine the applied overhead, a predetermined overhead rate is established prior to the production process. This rate is calculated by dividing the estimated total indirect costs for a specific period by the estimated allocation base, which is often a measure of production volume such as direct labor hours or machine hours. Once the predetermined overhead rate is determined, it is multiplied by the actual level of the allocation base used by the cost object during production.
The result of this calculation represents the applied overhead, which is then added to the direct costs associated with the cost object to determine the total cost. Applied overhead provides a method to allocate indirect costs in a systematic and consistent manner, allowing for a more accurate reflection of costs associated with the production process. This information is critical for decision-making purposes, such as setting appropriate prices for products or determining the profitability of specific products or services.
Etymology of APPLIED OVERHEAD
The etymology of the phrase "applied overhead" can be broken down as follows:
1. Applied: The word "applied" comes from the Latin word "applicare", which means "to attach or adhere". In this context, it refers to the process of assigning or allocating something, such as costs, to a particular item or project.
2. Overhead: The word "overhead" originated from the Old English word "oferehēafod", which means "above the head". It was originally used to describe the space above one's head, but in finance and accounting terminology, it refers to indirect costs incurred by a business that cannot be easily allocated to specific products or services. These costs include rent, utilities, administrative expenses, and other general operating expenses.
When combined, "applied overhead" refers to the actual allocation or assignment of indirect costs to a specific product or project.
