 Product costs are the total of direct materials, direct labor, and indirect manufacturing overhead. Recall that direct costs, like direct materials and direct labor, are traced to the finished product, whereas indirect costs, like manufacturing overhead, are allocated to the finished product. There are three common ways to allocate manufacturing overhead to products. The most common is the plant-wide rate. This is what we earlier described as the predetermined overhead rate. Another method is departmental rates, and finally, the most refined method is activity-based costing. This video will revisit the plant-wide rate method. Direct materials is a concept most understood because they end up in the product or the product packaging. Direct labor is also fairly understandable because it's the labor cost to directly assemble or manufacture the products. Manufacturing overhead is slightly more complicated. In short, it is all the costs in a manufacturing plant that aren't either direct materials or direct labor. Examples include depreciation, utilities, maintenance, supplies, insurance, and indirect labor, like supervision, setup, cleanup, and testing. With a plant-wide overhead rate, all of the manufacturing overhead is totaled and then allocated to products based on an allocation basis. Common allocation basis are direct labor costs, direct labor hours, or machine hours. When you first learned about a plant-wide rate, we used the term predetermined overhead rate. Remember that these terms are interchangeable. The formula for the plant-wide rate is estimated annual manufacturing plant overhead costs divided by the total estimated annual allocation basis. So let's look at an example of a dairy plant. I worked in the dairy industry for six years after I graduated from college. Most of that time as a cost accountant and one of my tasks was determined product costs each month. A dairy plant estimates that its manufacturing overhead will be $2.5 million for the upcoming year. It allocates overhead with a plant-wide rate using direct labor hours as the allocation basis. 100,000 direct labor hours are estimated to be used in the upcoming year, so we divide the cost of $2.5 million by the 100,000 direct labor hours to determine that $25 of overhead will be allocated to the gallons of milk for over one hour of direct labor hours used to manufacture the milk. Assume the plant can produce 2,500 gallons per hour, then each gallon will be allocated 1 cent of overhead.