Create Cost Pools This usually involves three areas for variable costs - materials, labor, and margin. Next, determine how much fixed cost to assign to each step. The simplest is to use time - how long will the step take and what percentage of overheads costs should be assigned. You will never get it exact but will be amazed when you compute all the costs and look at the price - how much margin are you really making?

Topics:

• Start with your new "TO BE" process as part of becoming the Lowest Cost Producer Divide the activities into cost pools, which includes all the individual costs related to an activity—such as manufacturing.
• Calculate the total overhead of each cost pool; Assign each cost pool activity cost drivers, such as hours or units;
• Calculate the cost driver rate by dividing the total overhead in each cost pool by the total cost drivers;
• Divide the total overhead of each cost pool by the total cost drivers to get the cost driver rate;
• Multiply the cost driver rate by the number of cost drivers.