Efficient Techniques for Calculating Applied Manufacturing Overhead in Production

How to Calculate Applied Manufacturing Overhead

Manufacturing overhead is an essential component of cost accounting, providing a clear understanding of the indirect costs associated with the production process. Calculating applied manufacturing overhead is crucial for businesses to determine the total cost of producing goods and to make informed decisions regarding pricing, budgeting, and cost control. In this article, we will explore the steps and formulas required to calculate applied manufacturing overhead accurately.

Firstly, it is important to distinguish between manufacturing overhead and direct costs. Direct costs are expenses that can be directly attributed to the production of a specific product, such as raw materials and labor. Manufacturing overhead, on the other hand, includes indirect costs that cannot be directly assigned to a particular product, such as factory rent, utilities, and depreciation of machinery.

To calculate applied manufacturing overhead, follow these steps:

1. Determine the manufacturing overhead rate: This rate is calculated by dividing the total manufacturing overhead costs by the total amount of a cost driver. The cost driver is a factor that causes the overhead costs to be incurred, such as machine hours, labor hours, or direct labor costs.

2. Calculate the total manufacturing overhead costs: Sum up all the indirect costs associated with the production process, including factory rent, utilities, depreciation, and other overhead expenses.

3. Identify the cost driver: Determine the most appropriate cost driver for your business. Common cost drivers include machine hours, labor hours, or direct labor costs.

4. Calculate the total cost driver usage: Determine the total amount of the cost driver used during the accounting period. For example, if the cost driver is machine hours, you would calculate the total machine hours used.

5. Apply the manufacturing overhead rate: Multiply the total cost driver usage by the manufacturing overhead rate to calculate the applied manufacturing overhead. This figure represents the amount of overhead allocated to each unit of production.

Here is a formula to calculate applied manufacturing overhead:

Applied Manufacturing Overhead = Total Cost Driver Usage x Manufacturing Overhead Rate

For example, if a company has a total manufacturing overhead cost of $100,000 and a cost driver of machine hours, and during the accounting period, the company used 10,000 machine hours, the manufacturing overhead rate would be $10 per machine hour. Therefore, the applied manufacturing overhead would be $100,000 (total overhead) / 10,000 (machine hours) = $10 per machine hour.

In conclusion, calculating applied manufacturing overhead is essential for businesses to understand the total cost of production and make informed decisions. By following the steps and formulas outlined in this article, businesses can ensure accurate calculations and improve their cost accounting practices.