What does plantwide mean?
Manufacturing or product costs consist of direct materials, direct labour and manufacturing overhead. Materials and labour are direct costs which can be traced to a cost object. Manufacturing overhead, on the other hand, is an indirect cost as it is used for the manufacturing of a wide variety of products and has to be allocated. There are two methods of allocating manufacturing overhead, i.e. the traditional method and the activity-based costing method (ABC) . Under the traditional method, a volume-based cost driver is used as an allocation base to drive overhead costs to products.
Images & Illustrations of plantwide
In general, the more cost pools used, the more accurate the allocation process. A single overhead rate for assigning all of the manufacturing production and service department costs to products.
Translations for plantwide
For example, the Hull Fabrication department at SailRite Company may find that overhead costs are driven more by the use of machinery than by labor, and therefore decides to use machine hours as the allocation base. The Assembly department may find that overhead costs are driven more by labor activity than by machine use and therefore decides to use labor hours or labor costs as the allocation base. In previous posts, we discussed plantwide overhead rates and departmental overhead ratesto allocate overhead costs to cost objects.
Of this total, the machining department is assigned overhead costs of $4,000,000 and the assembly department is allocated the remainder. The machining department uses machine hours as their allocation base and has 80, 000 machine hours. The assembly department uses direct labor hours as their allocation base and has 50,000 direct labor hours. Single plantwide factory overhead rate method and multiple production department factory overhead rate method and product cost distortion. Some companies have moved beyond both the plant-wide rate and the departmental rates because they want to consider all of the activities that are driving up manufacturing overhead costs.
The cost driver used in the traditional method can be applied to the whole organisation regardless of departments if manufacturing operations across departments are quite similar, i.e plant-wide allocation. The use of departmental allocation will typically result in a more accurate allocation of overhead costs since the cost driver used in each department is a more accurate reflection of its activities. Desktop Portable Assembly Department 0.50 dmh 1.00 dmh Testing Department 1.00 2.00 Total machine hours per unit 1.50 dmh 3.00 dmh a. Determine the per-unit factory overhead allocated to the desktop and portable computers under the single plantwide factory overhead rate method, using direct machine hours as the allocation base.
This rate is less accurate than departmental rates if a company manufactures a diverse group of products. Compare and contrast allocating overhead costs using a plantwide rate, department rates, and activity-based costing. Activity-based costing is a more precise way to allocate costs to cost objects. Plantwide rates are the easiest to apply but can cause cost distortionbecause all overhead resources are treated as though they are equally consumed by all cost objects.
- Although Figure 3.3 “Using Department Rates to Allocate SailRite Company’s Overhead” shows just two rates, many companies have more than two departments and therefore more than two rates.
- The department allocation approach allows cost pools to be formed for each department and provides for flexibility in the selection of an allocation base.
Another method for applying overhead isactivity-based costing (ABC). Using a plant-wide rate is logical when there is one root cause of the indirect production costs and the company manufactures similar products. single predetermined overhead rate used in all departments of a company, rather than having a separate rate for each department.
A. Determine the per-unit factory- overhead allocated to the gasoline and diesel engines under the single plantwide factory overhead rate method, using direct labor hours as the activity base. approach is similar to the plantwide approach except that cost pools are formed for each department rather than for the entire plant, and a separate predetermined overhead rate is established for each department. Instead, they will be broken out into various department cost pools. This approach allows for the use of different allocation bases for different departments depending on what drives overhead costs for each department.
Products going through the Assembly department are charged $23 in overhead costs for each direct labor hour used. For example, Hewlett Packard’s printer production division may choose to collect all factory overhead costs in one cost pool and allocate those costs from the cost pool to each product using one predetermined overhead rate.
Spring Company has identified 500 batches and has 10,000 square feet in their factory. Jackson Company uses activity-based costing to allocate their overhead costs. Design modification costs of $155,000 are based on number of design changes. Jackson Company has identified 40,000 batches and has 5,000 design modifications in their factory. Assume Kline Company allocates overhead costs with the plantwide approach, and direct labor cost is the allocation base.
If the company’s departments are homogeneous, the use of a single plantwide rate may be adequate as a means of allocating overhead costs to production jobs. A plant-wide overhead rate is a single rate used to assign or allocate all of a company’s manufacturing overhead costs to its production output. As shown in Figure 3.3 “Using Department Rates to Allocate SailRite Company’s Overhead”, products going through the Hull Fabrication department are charged $50 in overhead costs for each machine hour used.
The department allocation approach allows cost pools to be formed for each department and provides for flexibility in the selection of an allocation base. Although Figure 3.3 “Using Department Rates to Allocate SailRite Company’s Overhead” shows just two rates, many companies have more than two departments and therefore more than two rates.
What is a plant-wide overhead rate?
Departmental rates were more refined because at least we were breaking costs down by department and applying overhead based on the actual activity a cost object used in each department. Spring Company uses activity-based costing to allocate their overhead costs.
Calculate the rate used by the company to allocate overhead costs. Kline Company expects to incur $800,000 in overhead costs this coming year—$200,000 in the Cut and Polish department and $600,000 in the Quality Control department. Total annual direct labor costs are expected to be $160,000.
Organizations that use this approach tend to have simple operations within each department but different activities across departments. One department may use machinery, while another department may use labor, as is the case with SailRite’s two departments. This assumption of a causal relationship is increasingly less realistic as production processes become more complex.