Advantages of Using the Plantwide Overhead Rate Method
This type of overhead allocation is used in small entities with simple cost structures. This method takes into account the complexity of a company’s cost structure and the batch size of different products. It is more accurate than other methods of overhead allocation because it accounts for the costs of multiple departments with different levels of complexity. The plantwide overhead rate is more complex than other types of overhead allocation because it accounts for the batch size and amount of labor. A plantwide overhead rate is faster because it uses a single allocation base for all the costs.
It is easier to apply a plantwide overhead rate to a small number of departments. This method is more precise than the other types of overhead allocations because it uses valid identifiers to allocate costs across different departments. A plantwide overhead rate is not suitable for companies that operate many different types of services. Using cost pools allows a company to determine its total manufacturing expenses and then allocate costs to individual departments based on these identifiers.
A plantwide overhead rate can be calculated using a single cost-per-machine hour calculation. This method is more accurate than a departmental overhead rate. For example, if a manufacturing operation produces several similar products, it can calculate a plantwide overhead rate of $40 per machine hour for all production units. In this way, a company can budget $800,000 for its total manufacturing overhead costs and expect 20,000 machine hours of good output.
A plantwide overhead rate is more precise than the single cost allocation method. The plantwide cost allocation allows a company to allocate a plant’s overhead costs across multiple departments without having to assign cost drivers to individual products. In addition to accuracy, the single method can also be more flexible. It can be more efficient than the other methods. And it’s better for financial statements if the cost pools are well-defined and have a common basis.
For plants with multiple products, the overhead rate is calculated based on each department’s main activity. Each department’s overhead budget is divided by the cost drivers of its different departments. The shipping department may be responsible for several products, while the machining department is responsible for just one. So, when calculating an overall overhead rate, choose the most accurate method based on production volume.
o A plantwide overhead rate is more accurate than the traditional volume-based methods. The traditional method is less accurate and easier to implement. Compared to the other two methods, the plantwide overhead rate method is the preferred method for large manufacturing companies. The reason for this is that it allows for more effective cost control and has fewer cost objects. The latter has a lower level of accuracy.
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