What Is Applied Cost?

Applied cost is a term used in cost accounting to denote the cost assigned to something, which may be different from the actual cost. The applied cost is estimated and therefore may vary from the actual cost. The applied cost is determined for each cost object using an allocation rate. An allocation rate is the amount of an investor's cash or capital outlay that is used toward a final investment. Allocation rate generally refers to capital that is invested in a product minus whatever fees are incurred through the transaction of the investment.

Total costs for a line of business, including overhead operating costs, are calculated and every cost object within the line of business receives its share of applied cost given the assigned allocation rate. This ensures every item produced by the line of business incorporates some overhead costs.

Key Takeaways

  • An applied cost is a cost that has been allocated to a particular object, such as a product or department within a company.
  • A pre-determined allocation rate is used to determine the applied cost for each cost object.
  • The costs are not necessarily based on the costs that the product or department actually incurs, but rather the pre-determined formula.
  • Applied cost is a means of tracking and allocating costs that are incurred by items produced or services performed in a line of business.
  • The use of applied cost guarantees that the operation's overhead costs are accounted for.

Understanding Applied Cost

Applied cost is a way to allocate costs across items produced or services performed within a line of business. It makes sure that overhead costs of the operation are accounted for. Applied cost is used as a method for tracking costs within cost accounting, which is a discipline of accounting which compares costs of production to output produced.

Cost accounting is often part of a company's decision-making for many processes including budgeting and implementing cost controls. Cost accounting is different than other disciplines of accounting, such as managerial accounting and accrual accounting.

Example of Applied Cost

For example, in automobile manufacturing, the applied cost of a car would include overhead costs such as capital equipment depreciation for the machinery used to make the car. Every car unit would have an applied cost assigned to it based upon the allocation rate and the total costs for the line of business. Applied cost analysis could be used to improve manufacturing productivity and/or reduce per-unit costs.