How to Calculate the Percentage of Applied Manufacturing Overhead
Manufacturing overhead includes expenses for administration, equipment maintenance, facility insurance, property taxes and other fixed and variable costs. Applied manufacturing overhead is the cost that companies allocate to each job order in the production process. Total manufacturing costs include overhead and the cost of goods sold, which include the direct labor and materials costs for assembling and manufacturing products. You have to find the predetermined overhead rate to calculate the applied manufacturing overhead.
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Instructions
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Estimate the annual factory overhead costs. Use last year's factory overhead cost as the baseline. This information should be available in your internal management accounting system. Adjust this number for inflation. If you are anticipating an increase in order volume, you may also need to include additional amounts for manufacturing facility and equipment upgrade and maintenance. For example, if last year's factory overhead costs were $1 million, the annual inflation rate is 2 percent and you anticipate an additional $200,000 in facility upgrade and maintenance costs because of revenue growth, then the estimated annual factory overhead costs for next year are [$1 million + (0.02 x $1 million)] + $200,000 = $1.22 million.
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Determine the allocation base amount. Companies usually calculate manufacturing overhead as a multiple of a base, which could be direct labor hours, direct labor costs or some other operating variable.
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Calculate the predetermined overhead rate, which is the ratio of estimated annual factory overhead costs and the estimated allocation base. You may express this rate as a percentage. Continuing with the example and assuming an allocation base of 110,000 labor hours, the predetermined overhead rate is about $11.09 per labor hour ($1.22 million / 110,000). Assuming average labor costs of $15 an hour, the predetermined overhead rate is about 0.74 ($11.09 / $15), or 74 percent (0.74 x 100) of labor costs.
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Apply overhead to work-in-process inventory, which includes unfinished goods that are in various stages of assembly and production. To conclude the example, if direct labor hours are 7,000 for a particular month, the applied manufacturing overhead is $77,630 (7,000 x $11.09).
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Tips & Warnings
The actual overhead costs may be different from the applied overhead costs. It is an underapplied overhead if the applied costs are less than the actual costs, and an overapplied overhead if the applied costs are more than the actual costs.
