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 eggshells and banana peels. How much should the bakery charge the composter for the eggshells & banana peels that it produces? The bakery used to only produce a single product: banana bread. Now it produces two additional products: eggshells & banana peels. How much cost should it assign the eggshells & banana peels that it produces? If the bakery can remove some indirect or overhead costs from its banana bread (and assign them to its eggshells & 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?