FOH Applied Rate and Cost Drivers

One of the tools used for controlling FOH costs is the use of an FOH applied rate. Now how do we calculate this applied rate and what is its purpose? I'll start with the purpose. This is a budgeted rate based on the expected working conditions of the company, which is used to budget for the coming period.

The formula of FOH rate is = Total Budgeted Indirect Expenses/Expected capacity

The expected capacity could be expected hours of labour for the company's budgeted target of production, hours of machine running for the production of units expected, etc. Whatever it may be it is up to the management but it is better that the denominator chosen be the cost driver of that product.

Cost Driver is any activity in the production process that is primarily and largely responsible for the costs incurred. The higher the quality of the cost driver chosen the better the calculated applied rate.