ExplanationPlantwide overhead rate is a method of allocating manufacturing overheadManufacturing Overhead is the total of all the indirect costs involved in manufacturing a product like Property Tax on the production premise, Remunerations of maintenance personnel, Rent of the manufacturing building, etc. read more costs to the products and cost objectsA cost object is a method that measures product, segment, and customer cost separately to determine the exact cost and selling price. read more associated with the business. It is generally suited for small firms and has a simple cost structure. However, there are a few scenarios where its usage is suitable:
On the contrary, a single plantwide overhead rate is not suited for firms where the overhead to be allocated is a mammoth sum, various departments associated with the company are providing different levels and types of services, and lastly, when it is evident that the company must use different types of the allocation base. Therefore, in practical scenarios, it is generally seen companies will avoid its use and instead use a small number of cost poolsA cost pool is a strategy to identify the company's individual departments or service sector costs incurred. It determines the total expenses incurred in manufacturing goods and allocates them to different departments or service sectors based on valid identifiers known as cost drivers.read more, which are again separately allocated with different overhead rates. Although it is a time-consuming process, it increases the accuracy of the overall overhead allocation process. Thus, a trade-off between time and accuracy comes in the way of using a single plantwide overhead rate or usage of cost pools. Plantwide Overhead Rate Formula You are free to use this image on your website, templates, etc., Please provide
us with an attribution linkArticle Link to be Hyperlinked Plantwide Overhead Rate = Total Overhead / Direct Labor Hours It means the total number of direct labor hours is taken as the denominator, which is divided by the numerator as the total overhead cost of the company. How to Calculate?The calculation of the plantwide overhead rate first requires gathering the following information.
One more approach is to calculate the plantwide overhead rate using an alternative approach or direct costDirect cost refers to the cost of operating core business activity—production costs, raw material cost, and wages paid to factory staff. Such costs can be determined by identifying the expenditure on cost objects.read more method. Instead of direct labor hours, we use the direct cost for our calculation. To calculate this, we first need to identify the total direct cost of production and the total overhead cost for the specific period. Thus, this total overhead is divided by the total direct cost to ascertain the single plantwide overhead rate. ExampleLet us consider a scenario where a company’s total overhead cost for a specific month is $100,000. The manufacturing plant requires 1000 labor hours to manufacture 500 units of a specific product, which we assume as product X. The same manufacturing plant also produces 1000 units of another product, which we call product Y, using 500 labor hours. So, the total overall labor hours stand at 1500. To arrive at the calculation, we need to divide the total overhead of $100,000 by the total labor hours, which is 1500. We find the resultant number as 100,000/1500 = $67 as overhead per labor hour. Therefore, product A will need 1000/500 or 2 hours per production unit. Therefore, the overhead rate for product A is $67*2 = $134/unit. Similarly, product B needs 500/1000 or 0.5 hours per production unit. Therefore, the overhead rate for product B is $67*0.5 = $33.5/unit. Why it’s Important?
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What are advantages of using the plantwide overhead rate method?Advantages:. More accurate overhead cost allocation.. More effective overhead cost control.. Focus on relevant factors.. Better management of activities.. Under what conditions would you suggest using plant wide overhead rates?A plant-wide rate could be adequate in the following situations: There is one root cause of the indirect manufacturing costs. The company manufactures similar products. The company has relatively small, consistent amounts of inventory.
What is the company's 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.
When using the plantwide overhead rate method the cost object is quizlet?The cost object of the plantwide overhead rate method is: The unit of product.
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