What is Actual Overhead?

Actual overhead is the amount of indirect factory costs that are actually incurred by a business. Examples of actual overhead are the salaries of production supervisors, depreciation on production equipment, and the upkeep of manufacturing facilities and equipment. Actual overhead costs are accumulated into one or more cost pools, from which they are assigned to cost objects.

What is Applied Overhead?

Applied overhead is the amount of actual overhead that has been applied to goods produced. This is typically achieved with a standard overhead rate that is calculated once a year (or somewhat more frequently). For example, the budgeting staff forecasts that a firm will incur $1,000,000 of factory overhead costs in the upcoming year, and also expects that the firm will produce 100,000 units of finished goods during that time. Based on these estimates, the budgeting team establishes a standard overhead rate of $10 per unit produced. By the end of the year, only 95,000 units were produced, so the amount of applied overhead was only $950,000.

Comparing Actual Overhead and Applied Overhead

There are two key differences between actual and applied overhead, which are as follows:

Type of cost. Actual overhead is the amount of cost actually incurred, while applied overhead is the standard amount of overhead applied to cost objects. Given this difference, the two figures are rarely the same in any given year.
Need for reconciliation. If you are using applied overhead, you will need to reconcile the difference between actual and applied overhead on an ongoing basis. If you are only using actual overhead, then there is no need for a reconciliation.