Final answer:
The manufacturing overhead application rate is calculated by dividing total estimated manufacturing overhead costs by the total estimated allocation base for a specified period, such as direct labor hours or machine hours. An example calculation, given $50,000 in overhead and 10,000 machine hours, would yield a rate of $5 per machine hour.
Step-by-step explanation:
Calculating the Manufacturing Overhead Application Rate
The manufacturing overhead application rate is calculated to determine how much overhead cost should be applied to each product produced. This is an important measure in cost accounting, as it helps businesses to assign indirect costs (such as utilities, depreciation, and salaries for managers) to products. To calculate the rate, you would typically divide the total estimated manufacturing overhead costs by the total estimated amount of the allocation base (often direct labor hours, machine hours, or direct labor costs) for a given period.
For example, if a company expected to incur $50,000 in manufacturing overhead costs in August and anticipated using 10,000 machine hours, the manufacturing overhead application rate for August would be calculated as follows:
- Divide the total estimated overhead costs by the total estimated allocation base.
- $50,000 / 10,000 machine hours = $5 per machine hour.
The rate of $5 per machine hour is the applied rate, meaning for every machine hour worked, $5 of overhead should be applied to the products produced during that time.