Its primary purpose is to determine the full cost of a product, project, or service. Without it, companies would only know their direct costs, leading to a massive underestimation of what it truly costs to produce something.

Once you know the true cost of a job, you can set a price that guarantees a profit. Pricing based only on materials and direct labor is a recipe for losing money.

Companies estimate an overhead rate for the upcoming year (a predetermined rate). By comparing actual overhead costs to applied overhead throughout the year, they can identify inefficiencies and control spending.

It helps in assessing the profitability of different product lines or departments. A product that seems profitable based on its gross margin might actually be unprofitable once its share of the overhead is applied.