How to Calculate Overhead Using ABC

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When using activity-based costing, or ABC, to calculate overhead, companies take into account all of the activities used to manufacture a product, rather than just one activity. Activities can include engineering and testing the product and machine maintenance, along with any other actions taken to producing it. ABC addresses the changes in how overhead is calculated due to how goods are produced because of growing technology.

When using activity-based costing, or ABC, to calculate overhead, companies take into account all of the activities used to manufacture a product, rather than just one activity. Activities can include engineering and testing the product and machine maintenance, along with any other actions taken to producing it. ABC addresses the changes in how overhead is calculated due to how goods are produced because of growing technology.

Calculate your setup costs by taking your total costs assigned to setups, divided by the number of setups. You will end up with your setup cost per batch of goods produced.

Figure out your overhead costs per machine hour by dividing your total overhead costs, less your total setup cost, and divide it by the total machine hours. This will give you the overhead cost per machine hour, less the setup cost.

Divide the setup cost per batch of goods produced by the number of units in a batch to figure out the manufacturing overhead for setup per unit.

Divide the overhead cost per machine hour by the number of units produced per machine hour to get the overhead cost for production of each unit.

Add the amount you calculated for the manufacturing overhead for setup per unit and the amount you have for the overhead cost for production of each unit and you have the total manufacturing overhead for each unit produced, using ABC.

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About the Author

Oscar Sanchez has been writing professionally since 2008. He has had articles appear on the Ghiath Tech Blog as well as on the Downriver Repair Blog. He earned an associate degree in commerce from Monroe County Community College and is pursuing a Bachelor of Business Administration from Siena Heights University.

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