Why do we apply Vibhuti or Holy Ash over our body?

Vibhuti (meaning glory) or Bhasma (that by which our sins are destroyed and the Lord is remembered) is the holy ash that Hindus apply over their forehead and body. This holy ash is created by burning cow dung along with milk, ghee, honey, etc. It is a principle sacrament in the worship of Lord Siva, representing His burning away of our ignorance to ashes.

The cow dung is obtained from a cows that are fed sixteen varieties of medicinal leaves. The dung of these cows are collected after allowing sufficient time for digestion. The collected dung would then be formed into flat cakes and dried in the sun. 108 types of herbs, and twigs ['Samithi'] of high medicinal value are used in the homa in which the dried dung cakes are added. Six types of medicinal leaves are burnt along with these. The significance of using ash from the homa is that the impurities - physical and mental (ego, desires) are burnt off in the fire, and what remains is now pure - and the application of this ash serves as a reminder of this. The vibhuti we apply indicates that we should burn false identification with body and become free of the limitations of birth and death.
Applying vibhuti is a much more common practice amognst Shivites.

Vibhuti or Bhasma has medicinal properties and is used in many ayurvedic medicines. It absorbs excess moisture from the body and prevents colds and headches.