From the course: Finance and Accounting Tips

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Activity-based costing (ABC) and overhead

Activity-based costing (ABC) and overhead

From the course: Finance and Accounting Tips

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Activity-based costing (ABC) and overhead

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- 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…

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