Manufacturing overhead includes indirect manufacturing costs such as repairs and scrap depreciation. To allocate these costs to your inventory items, divide the manufacturing overhead by an allocation base, such as machine hours used or labor hours worked.

What is the formula for manufacturing overhead allocated?

This is done by dividing total overhead by the number of direct labor hours. For example, if the total overhead for making a product is $500 and the total direct labor hours is 150 hours, the overhead allocation rate is: Overhead allocation rate = Total overhead / Total labor hours. $500/150 = $3.33.

How is manufacturing overhead allocated to jobs?

Because manufacturing overhead costs are difficult to trace to specific jobs, the amount allocated to each job is based on an estimate. The process of creating this estimate requires the calculation of a predetermined rate.