Overhead application

Overhead application is the assignment of factory overhead costs to the units produced in a reporting period. The assignment is based on either a standard overhead rate that is used for multiple time periods, or a calculation that is specific to each reporting period. Overhead application is conducted in order to capitalize certain overhead costs into inventory. If the number of units on hand increases by the end of a reporting period, this means that a portion of factory overhead will be carried forward into the next period as an asset.