Chapter 6

Allocating Overhead

In This Chapter

arrow Using direct labor to apply overhead

arrow Identifying cost pools and drivers

arrow Assigning overhead with activity-based costing

After the Olympians claimed victory in the War of the Titans, Zeus sentenced Atlas to support all the celestial spheres on his shoulders, an event that many mythologist accountants consider the ultimate allocation of overhead. I know many managers who probably feel a lot like Atlas because they, too must bear unreasonably disproportionate shares of overhead.

Overhead costs include all the miscellaneous costs of doing business: utilities, supervision, security, and any other costs that don’t fit neatly into direct materials and direct labor — the materials and labor you can directly trace to a product. (You can read more about identifying direct and indirect/overhead costs in Chapter 3.) That said, you can’t ignore overhead just because it’s difficult to allocate. Ignoring overhead causes you to underestimate costs of products and processes, which can spell disaster if you underprice based on those figures and lose money.

As factories and processes automate (and people get replaced by robots), the direct labor needed ...

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