If an entity produces only one product or service, then (clearly) all of its efforts (costs) go to producing or providin

[answerhappygod]

If an entity produces only one product or service, then
(clearly) all of its efforts (costs) go to producing or providing
that product or service. This entity should use a
predetermined overhead rate (POHR) to estimate (assign) indirect or
overhead costs to its single product or service.
As a firm grows and gains efficiencies, it wisely pools or
shares resources to produce several (usually related) products or
services. Clearly, the firm benefits by pooling or sharing
resources, but, from the accounting perspective, which indirect or
overhead costs should be assigned to which product? This
question can affect PRICING the products or services!
For example: Imagine a bakery that produces banana bread.
Then, imagine that a composting firm approaches the bakery and
requests its egg shells and banana peels. How much should the
bakery charge the composter for the egg shells & banana peels
that it produces? The bakery used to only produce a single
product: banana bread. Now it produces two additional
products: egg shells & banana peels. How much cost
should it assign the egg shells & banana peels that it
produces? If the bakery can remove some indirect or overhead
costs from its banana bread (and assign them to its egg shells
& banana peels), then it can reduce prices on its banana bread
-- and maybe sell more loaves!
Of course, the bakery may strategically "give away" the egg
shells & banana peels, but it will incur costs to separate and
store these items until it can transfer them to the composter (even
if the composter picks-up the egg shells & banana peels).
So the bakery needs to CAREFULLY think about its indirect or
overhead costs and set its prices for ALL OF ITS PRODUCTS in such a
way that its revenues exceed all of its costs.
Indirect or overhead costs ARE tricky -- this is why
activity-based costing (ABC) is quite involved.
Continuing the example above, if there are two different
bakeries and the composter asks both of them for raw material to
compost, will each bakery assign indirect or overhead costs the
same way? Why or why not?