What is the Plantwide Allocation of Costs?The plantwide allocation method uses one predetermined overhead rate to allocate overhead costs. Show
Annual overhead costs are estimated and direct labor hours are used for the plantwide allocation base. These estimates are based on the previous year’s overhead costs and direct labor hours and are adjusted for expected increases in demand the coming year. The predetermined overhead rate is applied for each direct labor hour worked. One cost pool accounts for all overhead costs, and therefore one predetermined overhead rate is used to apply overhead costs to products. How to Determine Product Costs Using the Plantwide Allocation ApproachThe calculation of a product’s cost involves three components—direct materials, direct labor, and manufacturing overhead. This information, combined with the overhead cost per unit, gives us what we need to determine the product cost per unit for each model. Given the predetermined overhead rate per direct labor hour, and assuming it takes A hours of direct labor to build a unit product 1, and B hours to build a unit of product 2, we can calculate the manufacturing overhead cost per unit. Manufacturing overhead cost per unit is Base Rate × A direct labor hours + Base Rate × B direct labor hours. Combine the manufacturing overhead with direct materials and direct labor and we are able to calculate the product cost per unit. Although the plantwide allocation method is the simplest and least expensive approach, it also tends to be the least accurate. In spite of this weakness, why do some organizations prefer to use one plantwide overhead rate to allocate overhead to products? Organizations that use a plantwide allocation approach typically have simple operations with a few similar products. Management may not want more accurate product cost information or may not have the resources to implement a more complex accounting system. As we move on to more complex costing systems, remember that these systems are more expensive to implement. Thus the benefits of having improved cost information must outweigh the costs of obtaining the information. Related Topics
2 April 2022 21:16 Departmental overhead rates are more specific to calculate the overhead costs involved in producing a particular product than a single plant wide overhead rate. So, multiple departmental overhead rates are more accurate for product costing than a single plant wide overhead rate. Departmental overhead rates are used by many manufacturers instead of using a single, plant-wide overhead rate. The reason for departmental overhead rates is that a manufacturer is likely to produce many diverse products which use different processes (each of which has different costs). 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. What is the difference between a single plantwide overhead rate and a departmental overhead rate?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. Why separate departmental rates are preferred as compared to a plant wide blanket overhead rate?(i) Use of separate rates for different departments facilities better control, as the departmental managers being responsible for costs of their respective departments have a closer look on overheads incurred. (ii) Per unit and total costs of a product can be more accurately. 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. What is a disadvantage of the departmental overhead rate method?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. Why may departmental overhead rates not correctly assign overhead costs?Question: 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 of the following is a disadvantage of the departmental 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. What is departmental contribution to overhead?Definition: Departmental contribution to overhead is the amount of money a single department has available after its direct expenses are paid to help pay for the overhead of the business. Departmental contribution to overhead is calculated by subtracting direct expenses from the department’s revenues. What is an overhead absorption rate used for?The rate or rates calculated in an absorption costing system in advance of an accounting period for the purpose of charging the overheads to the production of that period. What is true about the 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. What is single overhead rate?Single overhead rate: In this case, the total amount of overhead costs is settled with one overhead rate, which is determined by dividing the former by the total direct costs amount from a given financial period. How do the multiple production department and the single plantwide factory overhead rate methods differ?-The multiple production department factory overhead rate method uses different rate for each production department to allocate factory overhead costs to products. In contrast, the single plantwide rate method uses only one rate to allocate factory overhead costs. Why are overhead costs allocated to products and not traced to products as direct materials and direct labor are?Direct material and direct labor costs are assigned to products because they can be easily traced to products, but manufacturing overhead costs are accumulated in cost pools and then allocated to products because those costs cannot be easily traced. When the amount of overhead absorbed is less than the amount of overhead incurred it is called?When the actual overhead is less than the absorbed overhead it is over absorption. If the absorbed overheads at predetermined rates are greater than actual overheads, this is known as OVER-ABSORPTION. What is a disadvantage of the departmental 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 a disadvantage to using a single plant wide 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 three key advantages of the plant wide and departmental overhead rate overhead allocation methods?More accurate overhead cost allocation -- because there are more cost pools and activity rates than other methods.. They are based on readily available information.. They are easy to apply.. They are consistent with GAAP and therefore can be used for external reporting.. What is one advantage of using a departmental rate for allocating overhead?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.
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The weakness of the departmental and the plantwide overhead rate methods is that
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