What you will learn to do: allocate manufacturing overhead using multiple allocation bases and rates
The single factory-wide rate is relatively simple to apply, but it assumes the same rate across all departments, each of which performs different functions. It also assumes all products consume factory overhead at the same rate. This “one-size-fits-all” approach may not be as accurate as other more targeted methods of allocating fixed manufacturing overhead.
For instance, let’s assume that Yore Company has two main departments in the production facility: assembly, which is done by machine, and finishing, which is done by hand and is therefore labor-intensive.
Using a single overhead rate, we determined the following overhead allocation options:
- Total overhead divided by total units ($188,000 / 3,760) = $50 per unit, both basic and deluxe
- Total overhead divided by machine hours ($188,000 / 47,000) = $4 per machine hour
- Total overhead divided by direct labor hours ($188,000 / 18,800) = $10 per labor hour
- Total overhead divided by direct labor dollars ($188,000 / $376,000) = $0.50 per labor dollar
Since Yore Company pays all of its employees at the same rate ($20 standard labor cost), allocating based on direct labor hours or direct labor dollars will yield the same result.
Allocating fixed manufacturing overhead evenly across all units resulted in the following cost per unit:
| Basic | Deluxe | |
|---|---|---|
| Direct Materials | $ 100.00 | $ 210.00 |
| Direct Labor | 82.50 | 200.00 |
| Manufacturing Overhead | 50.00 | 50.00 |
| Per unit cost | Single Line$ 232.50Double line | Single Line$ 460.00Double line |
Allocating fixed manufacturing overhead by direct machine hours resulted in the following cost per unit:
| Single Allocation Rate (DMH) | Basic | Deluxe |
|---|---|---|
| Direct Materials | $ 100.00 | $ 210.00 |
| Direct Labor | 82.50 | 200.00 |
| Manufacturing Overhead | 36.00 | 130.00 |
| Per unit cost | Single Line$ 218.50Double line | Single Line$ 540.00Double line |
Allocating fixed manufacturing overhead by direct labor cost or direct labor hours resulted in the following cost per unit:
| Single Allocation Rate (DMH) | Basic | Deluxe |
|---|---|---|
| Direct Materials | $ 100.00 | $ 210.00 |
| Direct Labor | 82.50 | 200.00 |
| Manufacturing Overhead | 41.25 | 100.00 |
| Per unit cost | Single Line$ 223.75Double line | Single Line$ 510.00Double line |
Let’s assume that upper management is interested in the most accurate representation of cost for each purse.
How would you decide which of the single-base methods to use? Does a deluxe purse cost $460 to manufacture or $540 or $510? If they are selling on the open market for $515 each, the method you choose to assign costs can make a big difference in how the company decides to allocate resources.
Accountants who have faced this problem have come up with more sophisticated methods of allocating fixed manufacturing overhead to products using cost pools. The most common of these methods are (1) using departmental rates, and (2) activity-based costing.
In this section, you will learn how to use multiple rates based on departments to determine overhead allocations.
When you are done with this section, you will be able to:
- Identify Departments, Cost Pools, and Cost Drivers
- Calculate predetermined overhead allocation rates by department
- Allocate manufacturing overhead to cost objects using multiple rates and cost pools
Learning Activities
The learning activities for this section include the following:
- Reading: Defining Cost Pools
- Self Check: Defining Cost Pools
- Reading: Establish Multiple Overhead Rates
- Self Check: Establish Multiple Overhead Rates
- Reading: Allocating Overhead Using Departmental Rates
- Self Check: Allocating Overhead Using Departmental Rates
