Operation codes can be used to calculate overhead associated with each operation. Overhead is applied to the labor, material, and/or outside processing costs. Both the fixed overhead and variable overhead can be calculated separately.
Overhead can be calculated based on the rate per hour and/or percentage of cost. The rate per hour calculates overhead applied on labor only. The percentage of cost calculates overhead for all costs including labor, material, and outside processing.
Fixed overhead is used to allocate factory overhead that does not vary with the amount of production. Typically, fixed overhead includes rent, property taxes, and depreciation.
Variable overhead is used to allocate factory overhead that varies with the amount of production. Typically, variable overhead includes electricity, gas consumed in furnaces, and the amount of lubricating oil used for machinery.
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