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Chilton allocates variable manufacturing overhead costs on the basis of machine hours. Chilton budgeted .5 machine hours per lamp and allocates overhead at a rate of $1.80 per machine hour. Last year Chilton manufactured 23,000 lamps, used 13,800 machine hours and incurred actual overhead costs of $15,180.
the measure of activity used to calculate an overhead rate. Also referred to as a cost driver. a grouping of overhead costs based on the major activity that created them. an approach to product costing that includes direct material, direct labor, and both fixed and variable manufacturing overhead in product cost. Also referred to as absorption costing. The alternative to full costing is variable costing which includes direct material, direct labor, and variable (but not fixed) manufacturing overhead.