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Definition: Applied Overhead
Manufacturing costs that are indirect in nature are generally referred to as overhead in accounting parlance. These indirect manufacturing costs include all the costs other than direct materials and direct labor cost.
There are basically two types of overhead in accounting:
• Actual Overhead
• Applied overhead
Actual overhead are indirect manufacturing costs that are incurred and properly recorded as well according to the well-defined accounting standards. Actual overheads include depreciation on plant and machinery, amortization in case of intangible assets, electricity expenses, distribution expenses, various kinds of taxes, maintenance costs etc.
Applied overhead are the manufacturing costs incurred at the time of production but are not recorded separately as per accounting standards as in case of actual overheads. Rather, in case of applied overhead, this cost is uniformly assigned to the goods manufactured. This type of overhead is applied to all the manufactured goods by using cost accounting method. This overhead is generally applied to various departments related to the production process and is applied on different departments using different formulas such as marketing department. However, the amount that the department needs to pay as applied overhead may or may not be incurred completely by that particular department.
For Example: If the manufacturer of goods estimates that in a particular coming year, there will be applied overhead of Rs. 60000 and the number of estimated machine hours will be 600, then for the coming year he will estimate the applied overhead to be equal to Rs. 100 per machine hour.
However, generally there should be minimum difference between the actual and estimated applied overhead.