It refers to the overhead cost that cannot specifically be matched with a particular product or service but still must be applied to the goods produced. In other words, applied overhead includes any expense that cannot directly be applied to the cost of a particular product or service such as salary of administrative staff, rent and insurance.
A business expects to incur $500,000 in overhead costs in the upcoming financial year. It also expects to have 11,000 production machine hours during the normal course of its business in the upcoming financial year. As a result, the business will apply or assign the expected overhead cost to the goods produced using a predetermined rate of $45 ($500,000 divided by 11,000) for every machine hour used in the manufacturing process.