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 is departmental overhead rate better?
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.
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.
What is departmental overhead rate?
A departmental overhead rate is a standard charge based on the units of activity produced by a business segment. Overhead rates at the departmental level are usually applied in a more refined cost allocation environment, where there is a need to apply overhead costs as precisely as possible.
What are the advantages of using a plantwide overhead rate?
More accurate overhead cost allocation. More effective overhead cost control. Focus on relevant factors. Better management of activities.
What is the difference between department allocation and plantwide allocation?
The plantwide allocation approach uses one cost pool to collect and apply overhead costs and therefore uses one predetermined overhead rate for the entire company. The department allocation approach uses several cost pools (one for each department) and therefore uses several predetermined overhead rates.
What is one disadvantage of using a departmental rate to allocate overhead?
Disadvantages. The departmental overhead rate will skew when each department is responsible for multiple products varying in labor and machine hours. This is likely to occur when departments are large. This also creates redundancy since each department must measure and calculate its respective rate.
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.
How do you calculate plantwide overhead rate?
Plantwide Overhead Rate Method To find your overhead cost, add up all your subtotals of expenses, direct and indirect. Divide your total expenses for the plant by the total number of units you produce. This will give you a per-unit rate.
How is departmental overhead calculated?
To calculate the overhead rate, divide the indirect costs by the direct costs and multiply by 100. If your overhead rate is 20%, it means the business spends 20% of its revenue on producing a good or providing services.
What is a disadvantage of the departmental overhead rate method?
Why are multiple overhead rates rather than a plantwide overhead rate used in some companies?
Some companies use multiple overhead rates rather than plantwide rates to more appropriately allocate overhead costs among products. Multiple overhead rates should be used, for example, in situations where one department is machine intensive and another department is labor intensive.