Learn about allocating overhead costs using activity-based costing. ABC allocates overhead costs based on the activities that drive—or are responsible for—certain overhead costs.
- In the old days of garages and mechanics,…if you went in to have work done on your car,…you'd be charged based on parts and labor.…You'd pay for the parts which would include a slight markup…to ensure that the garage made a little money…by saving you're having to go to the trouble…of locating the needed part yourself…and you'd be billed per hour cost…typically based on the time it took to do the job.…Now, that per hour cost would be more…than the labor actually paid to the mechanic.…The garage was charging you a per hour cost…that would cover the mechanic who actually worked on the job…and the per hour cost would also cover overhead costs…like the machinery and the equipment,…the rent and the utilities,…the insurance and the accountant.…
For example, again in the old days,…you'd go in to have your transmission replaced…and you might be billed parts plus $80 per hour.…That $80 per hour covered the mechanic…who was being paid $20 per hour and the balance, the 60,…was used to cover the other overhead costs.…The assumption was that these other overhead costs…
Skill Level Beginner
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