Using multiple department factory overhead rates instead of a single plantwide factory overhead rate

Question

BlackTom AI · Accepted Answer

Departmental overhead rates allocate overhead using cost drivers specific to each production department, so they reflect how each product actually consumes department resources.

Relevant concepts: factory (manufacturing) overhead must be allocated to products. A plantwide rate uses a single driver (e.g., total machine hours or direct labor hours) for the whole plant. Multiple (departmental) rates compute an overhead rate for each department using that department’s relevant activity base. This ties overhead assignment more closely to the cause-and-effect relationship between activities and costs.

Step-by-step reasoning with a simple numeric example:
1. Total overhead = $150,000 split by department: Machining OH = $100,000; Setup OH = $50,000.
2. Drivers and totals: Machining MH total = 10,000 MH; Setups total = 11 setups.
3. Plantwide rate (using machine hours) = $150,000 / 10,000 MH = $15 per MH.
   - Product X uses 5,000 MH → OH assigned = 5,000 × $15 = $75,000.
   - Product Y uses 5,000 MH → OH assigned = 5,000 × $15 = $75,000.
4. Departmental rates:
   - Machining rate = $100,000 / 10,000 MH = $10 per MH. Each product: 5,000 MH → $50,000.
   - Setup rate = $50,000 / 11 setups ≈ $4,545 per setup.
     • Product X (10 setups) → $45,455; Product Y (1 setup) → $4,545.
   - Total departmental OH: Product X = $50,000 + $45,455 = $95,455; Product Y = $50,000 + $4,545 = $54,545.

Why the correct answer is correct: departmental rates produce allocations that match differing consumption patterns (e.g., one product requires many setups). That yields more accurate product costs than a single plantwide rate which can misallocate costs when departments differ in cost behavior or activity drivers.

Why other choices are incorrect:
- "Results in distorted product costs": opposite—departmental rates reduce distortion compared with an inappropriate single rate.
- "Is simpler and less expensive": incorrect—departmental rates are typically more complex and may cost more to compute.
- "Applies overhead costs to all departments equally": incorrect—departmental rates allocate based on each department’s driver, not equally.

Conclusion: Using multiple department factory overhead rates results in more accurate product costs, which matches the provided answer.

Using multiple department factory overhead rates instead of a single plantwide factory overhead rateSingle choice

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What is the most practical way of disposing of the over or under applied overhead?

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