Fixed manufacturing overhead applied
/What is Fixed Manufacturing Overhead Applied?
Fixed manufacturing overhead applied is the amount of fixed production costs that have been charged to units of production during a reporting period. This overhead application is conducted in order to include the full set of manufacturing costs in the cost of each item produced, rather than just the costs of direct materials and direct labor. This inclusion of overhead costs gives management better information about how to set prices for the goods being sold, as well as to determine the fully-burdened profit margin on each product.
If the overhead application rate is based on actual fixed costs incurred, then the amount of overhead applied should match the amount incurred. If the overhead application rate is instead based on a standard application rate, then the amount applied may be higher or lower than the actual cost incurred.
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Example of Fixed Manufacturing Overhead Applied
A company produces chairs and has fixed manufacturing overhead costs of $50,000 per month, which include the following:
Depreciation on equipment: $20,000
Rent for the factory: $15,000
Salaries of factory supervisors: $15,000
The company estimates it will produce 10,000 chairs during the month. It uses machine hours as the activity driver and estimates 5,000 machine hours for the month. To calculate the overhead rate, divide the total fixed overhead costs of $50,000 by the 5,000 total estimated machine hours, resulting in an overhead rate of $10 per machine hour.
Suppose that a batch of 500 chairs requires 200 machine hours. The fixed overhead applied to this batch is calculated as $10/machine hour, multiplied by 500 chairs, for a total of $2,000. In short, the fixed manufacturing overhead of $2,000 is applied to the batch of 500 chairs based on the predetermined overhead rate of $10 per machine hour.
This process ensures that the fixed overhead costs are distributed proportionally across all products, even though these costs do not vary with production levels.