Accounting › Section S · Activity-based, variable, and absorption costing › Topic S.1
Traditional overhead allocation and cost drivers
Materials and labour can be traced to each product, but factory rent, supervision and machine maintenance cannot. Traditional costing spreads that overhead with one volume-based rate, and its accuracy depends on how well the chosen base reflects what really drives the cost.
In this topic
- The overhead problem
- What counts as manufacturing overhead
- One plantwide rate
- Worked example: Halvorsen Audio's plantwide rate
- Cost drivers
- Choosing the base
- Departmental rates
- Worked example: Halvorsen's two departments
- Value-added and non-value-added costs
- Common mistakes to avoid
- Key takeaways
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