What is Peanut-Butter Costing?

Peanut-butter costing involves assigning overhead costs using broad averages, rather than doing so in a more targeted manner. This approach is most common in businesses that do not have the resources to set up more refined cost allocations, or which are not interested in doing so. The name comes from how peanut butter is spread - uniformly over an entire piece of bread.

Disadvantages of Peanut-Butter Costing

A negative effect of peanut-butter costing is that overhead costs may be underapplied or overapplied to cost objects (such as products). When this happens, management may believe that a product has a cost that is lower or higher than may really be the case. If too little overhead has been applied to a product, there is a tendency to accept prices that are too low. Conversely, if too much overhead has been applied, management may raise the price of a product to an excessive extent in order to cover the cost, resulting in few sales and the loss of market share.

The Difference Between Peanut-Butter Costing and Activity-Based Costing

Activity-based costing (ABC) is the opposite of peanut-butter costing. It involves the identification of activities within a business, assigning costs to those activities, and then applying the costs of the activities to cost objects based on their activity usage. The result is much more targeted overhead cost allocations.