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

There are several disadvantages associated with the use of a peanut-butter costing system. They are as follows:

Lack of accuracy. Peanut butter costing applies an average allocation of costs, which might not reflect the actual expenses incurred by specific products or services. This means that high-cost items may appear more profitable, while low-cost items might seem less profitable than they actually are.
Distorted decision-making. Decisions based on inaccurate cost data can lead to the misallocation of resources, pricing errors, and poor strategic choices.
Hides inefficiencies. A uniform cost allocation hides inefficiencies within processes, departments, or product lines, making it harder to identify and address issues like wastage or unnecessary overhead.
Unfair cost distributions. Some departments or products may unfairly bear a disproportionate share of costs. This can lead to tension between teams or skewed performance evaluations.
Skewed product pricing. Products with over-allocated costs may end up priced higher than competitors, while under-allocated ones might be sold at unsustainable margins.
Incompatible with complex operations. In businesses with diverse offerings or operations (e.g., different product lines with varying resource needs), peanut-butter costing oversimplifies cost structures, failing to capture nuances.

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.