A plant-wide overhead rate is simple and wrong: it charges every product the same proportion of overhead regardless of the setups, changeovers and inspections it triggers. Activity-based allocation pools overhead by the work that drives it and charges each SKU for what it actually consumes, so the cost on the sheet matches the cost on the floor.
Cost and Profitability Consulting · 150+ models since 2010 · TDABC
A plant-wide rate spreads all overhead over a single base, usually labour or machine hours. That assumes overhead rises with that one measure, when in reality it is driven by many: the number of setups, the changeover time between products, the inspections a fiddly part needs, the handling and expediting a short run demands. A base that tracks none of those charges them to nobody in particular.
So the high-volume product, which absorbs a large share of the base, carries overhead it never caused, while the complex special, light on the base but heavy on setups and inspections, is charged far too little. The reported cost is precise and wrong, and every pricing and mix decision built on it inherits the error.
PLANT-WIDE RATE VS TRUE COST
Illustrative. Under a plant-wide rate both SKUs look profitable. Allocate overhead by its real drivers and the complex run carries its true burden, flipping into loss.
Group overhead by the activity it pays for: setup, changeover, quality, material handling, scrap, expediting, plant support.
Each pool gets the driver that actually moves it, setups, changeover minutes, inspections, moves, not a single volume base.
TDABC sets a cost per minute of practical capacity, so unused capacity shows as its own line instead of inflating every product's rate.
Each product carries the overhead its batch size, complexity and changeover frequency actually cause, traceable back to the driver.
| Plant-wide rate | Activity-based | |
|---|---|---|
| Allocation basis | Labour hours | Setups, runs, scrap |
| Overhead / unit, SKU A (simple) | €0.84 | €0.51 |
| Overhead / unit, SKU B (complex) | €0.84 | €2.10 |
| SKU A reported margin | understated | correct |
| SKU B reported margin | overstated | correct |
The total overhead is identical; only its allocation changes. But that change moves SKU B from apparent winner to real loss-maker, and stops SKU A subsidising it in silence.
EVERY SKU, BY SIZE AND TRUE MARGIN
Illustrative. With overhead allocated by driver, the loss-makers a single rate kept hidden separate clearly from the SKUs that carry the plant.
Allocate overhead by its drivers and the quote desk, the mix decision and the make-or-buy call all rest on a cost that reflects how each product is really made. The plant stops pushing complexity it loses money on and discounting the simple lines that quietly fund it.
The total cost does not change. Where it lands does, and that is the decision.
The Profit Check takes five minutes and no data upload. It shows how much your plant-wide rate is likely distorting product cost, and what it is worth to allocate by driver.