Traditional costing

Traditional costing allocates manufacturing overhead to products using a rate tied to a single volume measure, typically machine hours or direct-labour hours. The rate is set before the period and applied to every unit produced.

Also known asvolume-based costing

ByHoang TruongUpdated June 30, 2026

See it move

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A side-by-side comparison contrasts traditional costing with activity-based costing. Traditional costing uses a single plant-wide pool and a volume-based rate (€200,000 ÷ 40,000 machine hours = €5 per hour), which tends to overcharge simple, high-volume products. Activity-based costing uses one pool per activity and an activity rate (e.g. €50,000 ÷ 500 set-ups = €100 per set-up), directing costs to the products that actually consume each activity; both methods allocate the same total overhead but differ only in how it is spread across products.

Where it fits

SubjectCost AccountingAdvancedTopicOverhead Allocation & ABCAdvanced

The formula

LaTeX

POHR = \frac{BOH}{BAB}

Variables

$P O H R$: Predetermined overhead rate (€ per unit of base)
$B O H$: Budgeted manufacturing overhead for the period (€)
$B A B$: Budgeted volume of the allocation base (e.g. machine hours, direct-labour hours) (hours or units)

Set at the start of the period before actual costs are known; the same rate is applied throughout the year.

LaTeX

OH_{applied} = POHR \times AB_{actual}

Variables

$A B_{a} c t u a l$: Actual units of the allocation base consumed by the product (hours or units)

Each product or job is charged overhead based on how many units of the allocation base it actually consumed.