2) Departmental Overhead Rate

3) Activity Based Costing

Example 1 (Plantwide Overhead Rate): A business needs to allocate factory overhead to a product. The direct material cost of the product is $200 and the direct labor cost is $150. The business applies factory overhead based on direct labor costs. Assume the business estimated factory overhead cost to be $350,000 and direct labor costs to be $250,000 for the year. The business can sell the product for $800.

Example 2 (Activity Based Costing): A corporation reports the following (the estimated overhead costs/quantity relate to all products the company produces)

Activity Overhead Cost Driver Total Quantity

Mixing $50,000 Direct Labor hours 4,000 hours

Cooking $30,000 Machine Hours 2,500 hours

Packaging $25,000 Boxes 50,000 boxes

The business produced 30,000 boxes of cookies. Additional information related to the 30,000 boxes:

Direct Material $20,000

Direct Labor 22,500

Mixing 2,000 hours

Cooking 1,250 hours

Packaging 30,000 boxes