Allocated Overhead Cost vs. Applied Overhead Cost

Attribute	Allocated Overhead Cost	Applied Overhead Cost
Definition	Indirect costs assigned to products based on predetermined rates	Indirect costs assigned to products based on actual usage
Calculation	Calculated using predetermined rates and estimated usage	Calculated using actual usage data
Accuracy	May not reflect actual usage accurately	Reflects actual usage accurately
Flexibility	Less flexible as rates are predetermined	More flexible as rates are based on actual usage

Definition

Allocated overhead cost refers to the process of assigning indirect costs to specific cost objects based on a predetermined allocation rate. This rate is typically calculated using a cost driver, such as direct labor hours or machine hours. On the other hand, applied overhead cost involves the actual application of overhead costs to production units based on a predetermined rate. This rate is often determined at the beginning of a period and applied throughout the production process.

Calculation Method

Allocated overhead cost is calculated by multiplying the predetermined allocation rate by the actual amount of the cost driver used by each cost object. This method allows for a more accurate allocation of indirect costs to specific products or services. Applied overhead cost, on the other hand, is calculated by multiplying the predetermined overhead rate by the actual amount of the cost driver used in production. This method provides a standardized way to apply overhead costs to production units.

Accuracy

Allocated overhead cost can be more accurate than applied overhead cost because it takes into account the actual usage of the cost driver by each cost object. This allows for a more precise allocation of indirect costs to specific products or services. Applied overhead cost, on the other hand, may not always accurately reflect the actual usage of the cost driver in production, leading to potential inaccuracies in the allocation of overhead costs.

Flexibility

Allocated overhead cost can be more flexible than applied overhead cost because it allows for adjustments to the allocation rate based on changes in the usage of the cost driver. This flexibility enables companies to adapt to fluctuations in production levels or changes in the cost structure. Applied overhead cost, on the other hand, may be less flexible as it relies on a predetermined rate that is applied uniformly throughout the production process.

Cost Control

Allocated overhead cost can help companies control costs more effectively by providing a more accurate allocation of indirect costs to specific cost objects. This allows for better cost management and decision-making. Applied overhead cost, on the other hand, may not provide the same level of cost control as it relies on a predetermined rate that may not accurately reflect the actual usage of the cost driver in production.

Conclusion

In conclusion, allocated overhead cost and applied overhead cost both play important roles in the allocation of indirect costs to production units. While allocated overhead cost may offer greater accuracy and flexibility, applied overhead cost provides a standardized method for applying overhead costs to production. Companies should carefully consider the attributes of each method and choose the one that best suits their cost allocation needs.