The two assumptions regarding the usefulness of the single plantwide overhead rate method includes:

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:

• The total amount of overhead to be allocated is so small that using multiple allocation rates to achieve a higher level of allocation accuracy is unnecessary;

• The services provided by the various company departments are relatively similar (a rarity); or

• The single allocation base used is acceptable for allocating all of the overhead costs.

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.

SP 17 After reading an article about activity-based costing in a trade journal for the furniture industry, Santana Rey wondered if it was time to critically analyze overhead costs at Business Solutions. In a recent month, Santana found that setup costs, inspection costs, and utility costs made up most of its overhead. Additional information about overhead follows.

Activity Cost Driver

Setting up machines ……………….. $ 20,000 25 batches

Inspecting components …………… $ 7,500 5,000 parts

Providing utilities …………………… $ 10,000 5,000 machine hours

Overhead has been applied to output at a rate of 50% of direct labor costs. The following data pertain to Job 615.

Direct materials ……………………………………….. $2,500

Direct labor …………………………………………….. $3,500

Batches …………………………………………………. 2 batches

Number of parts ……………………………………….. 400 parts

Machine hours …………………………………………. 600 machine hours

Required

1. Classify each of its three overhead activities as unit level, batch level, product level, or facility level.

2. What is the total cost of Job 615 if Business Solutions applies overhead at 50% of direct labor cost?

3. What is the total cost of Job 615 if Business Solutions uses activity-based costing?

4. Which approach to assigning overhead gives a better representation of the costs incurred to produce Job 615? Explain.

The two main assumptions of the departmental overhead rate method include:

Get answer to your question and much more

A company uses the departmental overhead rate method. Total overhead costs are$5,000,000. Of this total, the machining department is assigned overhead costs of$4,000,000 and the assembly department is allocated the remainder. Themachining department uses machine hours as their allocation base and has 80,000machine hours. The assembly department uses direct labor hours as their allocationbase and has 50,000 direct labor hours. Calculate the overhead rate for themachining department.

Get answer to your question and much more

$4,000,000/80,000 machine hours=$50 per machine hour.The basis of the activity-based costing method is a(n)

Get answer to your question and much more

As compared to the plantwide overhead rate method, the departmental overheadrate method results ina)about the same overhead allocations.b)more accurate overhead allocations.c)exactly the same overhead allocations.d)less accurate overhead allocations.

Activity-based costing focuses primarily onactivities.

What are the advantages of using a single plantwide overhead rate?

What are the two stages for the departmental overhead rate method?

What overhead allocation method uses a single overhead rate?

Why departmental overhead rates might be used instead of a single plantwide overhead rate?