Multiple Predetermined Overhead Rates:
Learning Objectives of the Article:
- What are multiple predetermined overhead
- What is the need of calculating multiple
predetermined overhead rates?
When a single
predetermined overhead rate is used for entire factory it is called
plant wide overhead rate. This is fairly common practice - particularly
in smaller companies. But in large companies, multiple predetermined
overhead rates are often used.
In a multiple predetermined
overhead rate system, each production department may have its own
predetermined overhead rate. Such a system, while more complex, is
considered to be more accurate. Since it can reflect differences across
departments in how overhead costs are incurred. For example, overhead might
be allocated based on machine-hours in departments that are relatively
machine intensive. When multiple predetermined overhead rates are used,
overhead is applied in each department according to its own overhead rate as
a job proceeds through the department.
Enhancing the Accuracy of Product Costs
Only 34% of surveyed
manufacturing firms reported that they used a single, plant wide overhead
rate. The use of multiple overhead rates to obtain more accurate product
costs was reported by 44% of the firms. The remaining 22% use activity
based costing--an even more complex, and presumably more accurate,
approach to the allocation of overhead costs to products.
Source: Eun-Sup Shim and Joseph
M. Larkin, "A survey of current managerial accounting practices: Where do we
stand," Ohio CPA Journal, February 1994, p. 21 (4pages).