Legal Definitions - applied cost

Applied cost refers to an expense that has been formally assigned or allocated to a specific product, service, project, or department. This often involves distributing indirect costs, such as overhead, across various activities or outputs based on a predetermined method, rather than being a direct cost that can be easily traced to a single item.

Here are some examples to illustrate this concept:

• Manufacturing Overhead: Imagine a furniture manufacturer that produces various types of chairs and tables. The factory incurs general expenses like rent for the building, electricity for the entire plant, and salaries for quality control inspectors who oversee all production lines. These are indirect costs because they cannot be directly traced to a single chair or table. To determine the full cost of producing a specific model of chair, the manufacturer will apply a portion of these shared overhead costs to each chair produced. For instance, they might allocate these costs based on the number of labor hours spent on each chair, thereby assigning a share of the factory's total indirect expenses to that particular product.

• Software Development Project: A large technology company has a central IT infrastructure team responsible for maintaining servers, network security, and providing general technical support across all its software development projects. The salaries of this IT team and the cost of the infrastructure itself are indirect costs. When a specific team is developing a new mobile application, the company will apply a portion of the central IT infrastructure costs to that mobile app project. This allocation helps to accurately reflect the total resources consumed by the project, even though the IT team wasn't exclusively dedicated to that single app.

• Consulting Firm Administrative Costs: A management consulting firm employs a team of administrative assistants, maintains a central office space, and subscribes to various research databases that are used by all consultants. These are general administrative expenses that support the entire firm. When the firm undertakes a specific client engagement, such as developing a new market entry strategy for a client, it will apply a share of these administrative costs to that particular client project. This ensures that the client is billed not only for the direct consultant hours but also for a fair portion of the underlying operational support that made the project possible.