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What is a Plantwide Overhead Rate?The plantwide overhead rate is a single overhead rate that a company uses to allocate all of its manufacturing overhead costs to products or cost objects. It is most commonly used in smaller entities with simple cost structures. Using a plantwide overhead rate is acceptable in the following circumstances:
Conversely, a single plantwide overhead rate is not acceptable if a company has a large amount of overhead to allocate, services provided by the various departments are highly differentiated, or it is apparent that a number of different allocation bases should be used. In reality, the typical company avoids the use of a single plantwide overhead rate, and instead uses a small number of cost pools that are separately allocated with different overhead rates. Doing so improves the accuracy of overhead allocation, but increases the amount of time required to close the books. Thus, there is a trade-off between more accounting effort to track and allocate multiple cost pools, and the enhanced financial statement accuracy associated with this additional effort. The departmental overhead rate is an expense rate calculated for each department in a factory production process. The departmental overhead rate is different at every stage of the production process when various departments perform selected steps to complete the final process. By breaking up overhead costs for individual business sections rather than having a company-wide rate, management can assess corporate inefficiencies more accurately and take more specific action. What Does the Departmental Overhead Rate Tell You?An overhead rate, in managerial accounting, is an additional cost added on to the direct costs of production in order to more accurately assess the profitability of each product. To allocate these costs, an overhead rate is applied that spreads the overhead costs around depending on how much resources a product or activity used. For example, overhead costs may be applied at a set rate based on the number of machine hours required for the product. In more complicated cases, a combination of several cost drivers may be used to approximate overhead costs. The departmental overhead rate is specific to every segregated step in the entire process. For example, if a company makes bread, different departmental rates could be used for the actual production/manufacturing line and the bagging process. Cost-cutting, efficiency and productivity are standard elements of a strong corporate performance methodology. Analysis and benchmarking of departmental overhead rates is an effective way to measure success. Comparisons between competitors, as well as among various internal departments help isolate efforts that are adding value, and those that are destroying enterprise value. No two cost-cutting approaches are the same. Like all things in business, there are pros and cons to the myriad of strategies businesses can utilize. However, by following trends in departmental rates, patterns do emerge highlighting the delicate balance of short-term goals with long-term business requirements. Determining Departmental Overhead RatesDetermining appropriate departmental rates is an area addressed by managerial accounting methods. Managerial accounting is the process of identifying, measuring, analyzing, interpreting and communicating information for the pursuit of an organization's goals. This branch of accounting is also known as cost accounting. The key difference between managerial and financial accounting is managerial accounting information is aimed at helping managers within the organization make decisions, while financial accounting is aimed at providing information to parties outside the organization. In managerial accounting, rather than using one overhead rate to allocate all of the overhead costs, overhead costs can be broken down by departments. Departmental overhead rates offer the flexibility to use a different activity or cost driver for each department. Often, some departments will rely heavily on manual labor while others require more machinery. Direct labor hours can be important to certain departments but machine hours might work better for others. Using departmental overhead rates will better reflect the costs of manufacturing Product A and Product B compared to using a single, plant-wide overhead rate. Departmental overhead rates offer the flexibility to use a different activity or cost driver for each department. Often, some departments will rely heavily on manual labor while others require more machinery. Direct labor hours can be important to certain departments but machine hours might work better for others. What is one advantage of using a departmental rate for allocating overhead?Easier to Manage Why multiple overhead rates should be used in this company rather than a single rate?If your product mix is more complex and customized, you may use multiple overhead rates to allocate costs more accurately. If one department is machine-intensive and another is labor-intensive, for example, multiple rates may be appropriate. When should you use a plantwide overhead rate?Plantwide Overhead Rate Method The plantwide overhead rate method is practical when (1) overhead costs are closely related to production volume, or (2) a company produces only one product. Which of the following is a disadvantage to using a single plantwide factory overhead rate?Which of the following is a disadvantage to using a single plantwide factory overhead rate? The rate assumes that factory overhead costs are consumed in the same way by all products. What are the advantages of using a single plantwide overhead rate?Advantages: More accurate overhead cost allocation. More effective overhead cost control. Focus on relevant factors. Why do you consider departmentalization of overheads necessary?The departmentalization overhead costs is important because bit allows for better planning and control if the head of each department is held accountable for costs and productivity of his department. What will the use of departmental overhead rates generally result in?The use of departmental overhead rates will generally result in: The use of a separate cost allocation base for each department in the shop. What are the advantages of departmentalization of factory overhead?What are the advantages of departmentalizing manufacturing overhead costs? The departmentalizing of manufacturing overhead costs allows for better planning and control if the head of each department is held responsible for the costs and productivity of his or her department. What is the rationale for the use of departmental rates rather than blanket rates?What are the benefits of using a departmental overhead rate? Using a departmental overhead rate is beneficial because it ensures that all jobs and Units of Production are charged with their fair share of overheads. This is suitable when jobs and units do not spend a similar amount of time in each department. Why may departmental overhead rates not correctly assign overhead costs?Departmental overhead rates will not correctly assign overhead costs in situations where a company has a range of products and complex overhead costs. This is because the departmental approach relies exclusively on volume-related allocation bases. What is single plantwide rate?The plantwide overhead rate is a single overhead rate that a company uses to allocate all of its manufacturing overhead costs to products or cost objects. It is most commonly used in smaller entities with simple cost structures. Which of the following is a disadvantage of the department overhead rate method?Which of the following is a disadvantage of the departmental overhead rate method? It may fail to accurately assign many overhead costs that are not driven by production volumn. Which of the following is considered the most accurate method in allocating overhead costs to products?An activity-based costing system is considered more complex than using a single plantwide rate to allocate overhead, but an ABC system is also considered a more accurate way to allocate overhead costs. How do cost flows using activity-based costing differ from cost flows using one plantwide rate?Chapter 3 Item #5 How do cost flows using activity-based costing differ from cost flows using one plantwide rate? Activity-Based Costing differs to plantwide because ABC uses more than cost pool, allowing the cost to allocated to each products based on activities needed to complete the product. What are the advantages of departmentalization?The main advantages of departmentalization can be highlighted as follows:
What is departmentalization overhead?Departmentalization of overheads refers to the process of determining the overhead costs of each department involved in production. What is known as departmentalization of overhead?Departmentalization of overhead is known as primary distribution. Primary distribution involves apportionment or allocation of overhead to all departments in a factory on logical and rational basis. This process of apportionment is also known as departmentalisation of overhead. What will the use of departmental overhead rates generally result in?The use of departmental overhead rates will generally result in: The use of a separate cost allocation base for each department in the shop. Which allocation method is best?The best method for allocating overhead in construction is a way that’s fair. After all, the idea is to allocate (or, distribute) costs that each job shares responsibility for — meaning the job either caused or benefited from the cost. But, the costs should also be proportional to that responsibility. Why are departmental overhead rates sometimes not accurate in assigning overhead costs to products?Departmental overhead rates may not correctly assign overhead costs due to: a. the use of direct labor hours in allocating overhead costs to products rather than machine time or quantity of materials used. Which is the most scientific practical and accurate method of recovery of overhead?Answer: Machine Hour Rate: Machinery hour rate means the expenses incurred while running a machine for one hour. No doubt, it is quite logical and- scientific method for absorption of factory overheads used in production. Which overhead absorption rate is generally used where we use more machines in the production process?Machine hour rate method is suitable when machines are extensively used in production. Merits: (1) It is a scientific method of absorption, since time factor is taken into account. What are the two methods of accounting for factory overhead?Methods of Predetermined Factory Overhead Rates
Why departmental overhead rates might be used instead of a single plantwide overhead rate?Using departmental overhead rates will better reflect the costs of manufacturing Product A and Product B compared to using a single, plant-wide overhead rate.
Why multiple overhead rates should be used in this company rather than a single rate?If your product mix is more complex and customized, you may use multiple overhead rates to allocate costs more accurately. If one department is machine-intensive and another is labor-intensive, for example, multiple rates may be appropriate.
What are the advantages of using a single plantwide overhead rate?Advantages: More accurate overhead cost allocation. More effective overhead cost control. Focus on relevant factors.
Why is it better to use separate overhead rates?Within a large manufacturing business with departments ranging from sales to assembly to administration, separating overhead rates gives management a clearer picture of the price of production.
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Explain why departmental overhead rates might be used instead of a single plantwide overhead rate.
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