{"id":126,"date":"2021-01-26T22:11:19","date_gmt":"2021-01-26T22:11:19","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&#038;p=126"},"modified":"2021-08-15T20:05:30","modified_gmt":"2021-08-15T20:05:30","slug":"allocating-overhead-using-a-single-plant-wide-rate","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/chapter\/allocating-overhead-using-a-single-plant-wide-rate\/","title":{"raw":"Allocating Overhead Using a Single, Plant-wide Rate","rendered":"Allocating Overhead Using a Single, Plant-wide Rate"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Allocate manufacturing overhead to cost objects using a single, plant-wide rate<\/li>\r\n<\/ul>\r\n<\/div>\r\n<img class=\"size-medium wp-image-1634 alignright\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/13224524\/claudio-schwarz-purzlbaum-0NokUjOSEso-unsplash-300x200.jpg\" alt=\"Many different colored purses hanging on a wall\" width=\"300\" height=\"200\" \/>Once we have determined our allocation rate, we apply that rate to each product or product line in order to assign costs to individual items or batches.\r\n<h2>Allocating Based on Direct Machine Hours<\/h2>\r\nIn our example, Yore Company\u2019s automated process turns out a basic purse every nine hours, but the more complicated deluxe purse takes 32.5 hours of machine time. Our machines will run for 28,800 hours to produce 3,200 basic purses (9 * 3,200) and another 18,200 hours to produce 560 deluxe purses (32.5 * 560) for a total of 47,000 hours. Imagine 65 machines running 24 hours a day. Forty of them are producing nothing but basic purses and the other 25 are producing deluxe purses.\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<tbody>\r\n<tr>\r\n<td>Allocate fixed manufacturing overhead using a plant-wide overhead allocation rate based on direct-machine hours:<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Formula for allocating fixed overhead:<\/td>\r\n<td><\/td>\r\n<td>allocation rate<\/td>\r\n<td>times<\/td>\r\n<td>direct machine hours<\/td>\r\n<td>equals<\/td>\r\n<td>overhead allocated to individual product<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Allocation to Basic Purse product line<\/td>\r\n<td><\/td>\r\n<td>$4.000<\/td>\r\n<td>X<\/td>\r\n<td>28,800<\/td>\r\n<td>=<\/td>\r\n<td>$115,200.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Allocation to Deluxe Purse product line<\/td>\r\n<td><\/td>\r\n<td>$4.000<\/td>\r\n<td>X<\/td>\r\n<td>18,200<\/td>\r\n<td>=<\/td>\r\n<td>$72,800.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 \u00a0 \u00a0 \u00a0 Total allocation base<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span> $188,000.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td>total fixed overhead to be allocated<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nThe standard overhead rate based on direct machine hours (DMH) would be $4.00 per machine-hour ($188,000\/47,000 machine-hours). Based on that rate, we would allocate $36.00 to each basic purse ($4\/DMH * 9 hours) and $130.00 to each deluxe purse ($4\/DMH * 32.5 hours).\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<tbody>\r\n<tr>\r\n<td>Determine the per-unit costs for each product<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Formula used to allocate overhead to individual products<\/td>\r\n<td>overhead allocated to product lines<\/td>\r\n<td>divided by<\/td>\r\n<td># of units produced<\/td>\r\n<td>equals<\/td>\r\n<td>overhead allocated to individual product<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Allocation to Basic Purses<\/td>\r\n<td>$115,200.000<\/td>\r\n<td>\/<\/td>\r\n<td>3,200<\/td>\r\n<td>=<\/td>\r\n<td>$36.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Allocation to Deluxe Purses<\/td>\r\n<td>\u00a0 $72,800.000<\/td>\r\n<td>\/<\/td>\r\n<td>560<\/td>\r\n<td>=<\/td>\r\n<td>$130.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nThe full cost of each purse would be:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<tbody>\r\n<tr>\r\n<th scope=\"col\">Single Allocation Rate (DMH)<\/th>\r\n<th class=\"r\" scope=\"col\">Basic<\/th>\r\n<th class=\"r\" scope=\"col\">Deluxe<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>\u00a0 Direct Materials<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 100.00<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 210.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Direct Labor*<\/td>\r\n<td class=\"r\">82.50<\/td>\r\n<td class=\"r\">200.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"highlight\">\u00a0 Manufacturing Overhead<\/td>\r\n<td class=\"r highlight\">\u00a0 36.00<\/td>\r\n<td class=\"r highlight\">130.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Per unit cost<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 218.50<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 540.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n<p style=\"padding-left: 30px;\">* basic = 4.125 hours * $20\/hour, deluxe = 10 hours * $20\/hour<\/p>\r\nThis would result in a gross profit per unit of:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<tbody>\r\n<tr>\r\n<th scope=\"col\">Single Allocation Rate (DMH)<\/th>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Sales Price<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 245.00<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 515.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: Direct Variable Costs<\/td>\r\n<td class=\"r\">182.50<\/td>\r\n<td class=\"r\">410.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>62.50<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>105.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: Allocated Fixed Costs<\/td>\r\n<td class=\"r\">36.00<\/td>\r\n<td class=\"r\">130.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Gross profit per unit<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 26.50<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 (25.00)<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nTo check our work, let\u2019s multiply the gross profit per purse by unit sales to compute total gross profit by product line and by total:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\">Basic<\/th>\r\n<th class=\"r\" scope=\"col\">Deluxe<\/th>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Gross profit per unit<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 26.50<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 (25.00)<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Times number of units sold<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 3,200<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 560<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total gross profit<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 $\u00a0 \u00a0 \u00a0 84,800<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 \u00a0 $ \u00a0 (14,000)<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total gross profit - basic<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">$ \u00a0 84,800.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total gross profit - deluxe<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">(14,000.00)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total gross profit, all products<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 70,800.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n&nbsp;\r\n\r\n<\/div>\r\nNotice that under this allocation method, using direct machine hours instead of units, we have a dramatically different outcome. Under this allocation method, it looks like the deluxe purse is actually losing money.\r\n<h2>Allocating Based on Direct Labor<\/h2>\r\nLet\u2019s say we consider our operation to be labor-intensive rather than capital-intensive (automated). In that case, we might choose to allocate fixed overhead based on direct labor hours (DLH) or direct labor dollars (DL$). If our standard direct labor cost is the same for both purses, these two calculations will produce the same results, so in this lesson, we\u2019ll use DL$. However, if workers producing deluxe purses are more highly paid than workers producing basic purses, the outcome between the two direct labor methods would be different.\r\n\r\nLet\u2019s review our standard costs again:\r\n<div align=\"left\">\r\n<table class=\"fin-table gridded\">\r\n<tbody>\r\n<tr>\r\n<th scope=\"col\"><\/th>\r\n<th scope=\"col\">Basic<\/th>\r\n<th scope=\"col\">Deluxe<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Planned production<\/td>\r\n<td class=\"r\">3,200<\/td>\r\n<td class=\"r\">560<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Standard\/Budget to make one purse<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Direct Machine Hours<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 9.000<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 32.500<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Direct Labor Hours<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 4.125<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 10.000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Direct Labor Cost per Hour<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 20.00<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 20.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Direct Materials<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 100.00<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 210.00<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n&nbsp;\r\n\r\n<\/div>\r\nWorkers turn out a basic purse every 4.125 hours, but the more complicated deluxe purse takes 10 hours of labor. Our line workers put in 13,200 hours to produce 3,200 basic purses (4.125 * 3,200) and another 5,600 hours to produce 560 deluxe purses (10 * 560) for a total of 18,800 hours. This would be 78 laborers working in three shifts, running the machines and finishing the products by hand, 24 hours a day (26 direct labor workers each shift). Eighteen of those laborers are working on basic purses, and 8 are working on deluxe.\r\n\r\nAt a standard rate of $20 for wages and benefits, the Direct Labor Dollars for basic and deluxe purses will be $264,000 and $112,000, respectively (13,200 hours * $20\/hour = $264,000, and 5,600 hours * $20\/hour = $112,000) for a total DL$ base of $376,000.\r\n\r\nA standard overhead rate based on direct labor dollars (DL$) would be $0.50 per DL$ ($188,000\/376,000). Based on that rate, we would allocate $41.25 to each basic purse ($0.50\/DL$ * $82.50\/purse) and $100.00 to each deluxe purse ($0.50\/DL$ * $200.00\/purse).\r\n\r\nThe full cost of each purse would be:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<tbody>\r\n<tr>\r\n<th scope=\"col\">Single Allocation Rate (DL$)<\/th>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>\u00a0 Direct Materials<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 100.00<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 210.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Direct Labor<\/td>\r\n<td class=\"r\">82.50<\/td>\r\n<td class=\"r\">200.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"highlight\">\u00a0 Manufacturing Overhead<\/td>\r\n<td class=\"r highlight\">41.25<\/td>\r\n<td class=\"r highlight\">100.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 Per unit cost<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 223.75<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 510.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nThis would result in a gross profit per unit of:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<tbody>\r\n<tr>\r\n<th scope=\"col\">Single Allocation Rate (DL$)<\/th>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Sales Price<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 245.00<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 515.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: Direct Variable Costs<\/td>\r\n<td class=\"r\">182.50<\/td>\r\n<td class=\"r\">410.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>62.50<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>105.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: Allocated Fixed Costs<\/td>\r\n<td class=\"r\">41.25<\/td>\r\n<td class=\"r\">100.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Gross profit per unit<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 21.25<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 5.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nTo check our work, let\u2019s multiply the gross profit per purse by unit sales to compute total gross profit by product line and by total:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\">Basic<\/th>\r\n<th class=\"r\" scope=\"col\">Deluxe<\/th>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Gross profit per unit<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 21.25<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 5.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Times number of units sold<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 3,200<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 560<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total gross profit<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 $\u00a0 68,000<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 \u00a0 $ \u00a0 \u00a0 \u00a0 2,800<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total gross profit - basic<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">$ \u00a0 68,000.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total gross profit - deluxe<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">$ \u00a0 \u00a0 2,800.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Total gross profit, all products<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 70,800.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nNotice that the total gross profit remains the same no matter how we allocated fixed manufacturing overhead to product lines. What is changing is the gross profit for each type of product.\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>Yore Company\r\nIncome Statement (full absorption)\r\nFor the month ending October 31, 20XX<\/caption>\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Amount<\/th>\r\n<th scope=\"col\">Amount<\/th>\r\n<th scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">$ 1,072,400.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"4\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>\u00a0\u00a0\u00a0Variable manufacturing costs<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct Materials, basic<\/td>\r\n<td class=\"r\">$ \u00a0 \u00a0 320,000<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct Labor, basic<\/td>\r\n<td class=\"r\">264,000<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Total direct costs, basic<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r\">584,000.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct Materials, deluxe<\/td>\r\n<td class=\"r\">117,600<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct Labor, deluxe<\/td>\r\n<td class=\"r\">112,000<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Total direct costs, deluxe<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r\">229,600.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0Fixed manufacturing costs<\/td>\r\n<td><\/td>\r\n<td class=\"r\">188,000.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cost of Goods Manufactured and Sold<\/td>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r\">1,001,600.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Gross Profit<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>70,800.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"4\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Selling, General, and Administrative Costs<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0Variable Selling, General, and Administrative<\/td>\r\n<td><\/td>\r\n<td class=\"r\">18,800.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0Fixed Selling, General, and Administrative<\/td>\r\n<td><\/td>\r\n<td class=\"r\">35,600.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Total Selling, General, and Administrative<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">54,400.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Net income from operations<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 16,400.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nHere is a recap of our results so far:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\">Basic<\/th>\r\n<th class=\"r\" scope=\"col\">Deluxe<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td class=\"highlight\" colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Simple Average (total fixed manufacturing overhead divided by number of units)<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales Price<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 245.00<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 515.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: Direct Variable Costs<\/td>\r\n<td class=\"r\">182.50<\/td>\r\n<td class=\"r\">410.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>62.50<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>105.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: Allocated Fixed Costs<\/td>\r\n<td class=\"r\">50.00<\/td>\r\n<td class=\"r\">50.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"highlight\">Gross profit per unit<\/td>\r\n<td class=\"r highlight line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 12.50<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r highlight line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 55.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"highlight-red\" colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Single Allocation Rate (DMH)<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales Price<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 245.00<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 515.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: Direct Variable Costs<\/td>\r\n<td class=\"r\">182.50<\/td>\r\n<td class=\"r\">410.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>62.50<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>105.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: Allocated Fixed Costs<\/td>\r\n<td class=\"r\">36.00<\/td>\r\n<td class=\"r\">130.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"highlight-red\">Gross profit per unit<\/td>\r\n<td class=\"r highlight-red line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 26.50<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r highlight-red line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 (25.00)<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"highlight-green\" colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Single Allocation Rate (DL$)<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Sales Price<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 245.00<\/td>\r\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 515.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: Direct Variable Costs<\/td>\r\n<td class=\"r\">182.50<\/td>\r\n<td class=\"r\">410.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 62.50<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>105.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: Allocated Fixed Costs<\/td>\r\n<td class=\"r\">41.25<\/td>\r\n<td class=\"r\">100.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"highlight-green\">Gross profit per unit<\/td>\r\n<td class=\"r highlight-green line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 21.25<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<td class=\"r highlight-green line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 5.00<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n&nbsp;\r\n\r\n<\/div>\r\nAgain, notice that dividing fixed manufacturing overhead by number of units makes the gross profit for the deluxe purse significantly higher than if fixed manufacturing overhead is allocated according to direct labor. By allocating fixed manufacturing overhead by machine hours, the deluxe purse is actually costing more to produce than it is selling for.\r\n\r\nAllocating based on a single rate for the entire organization has pros and cons:\r\n\r\nDividing by number of total units of all products:\r\n<ul>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Simple.<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">May not accurately reflect the use of resources because it allocates fixed manufacturing overhead evenly over all products.<\/li>\r\n<\/ul>\r\nAllocating based on direct machine hours:\r\n<ul>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">May be more accurate for automated processes (e.g. where fixed manufacturing overhead includes depreciation on machines, repairs and maintenance, etc.).<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Slightly more complicated than simply dividing fixed manufacturing overhead by number of units of everything produced.<\/li>\r\n<\/ul>\r\nAllocating based on direct labor hours:\r\n<ul>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">May be more accurate for labor-intensive processes (e.g. where people are doing most of the work by hand).<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Slightly more complicated than simply dividing fixed manufacturing overhead by number of units of everything produced.<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">May or may not give desired results if hourly labor costs are higher for certain product lines.<\/li>\r\n<\/ul>\r\nAllocating based on direct labor dollars:\r\n<ul>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">May be more accurate for labor-intensive processes (e.g. where people are doing most of the work by hand).<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">Slightly more complicated than simply dividing fixed manufacturing overhead by number of units of everything produced.<\/li>\r\n \t<li style=\"font-weight: 400;\" aria-level=\"1\">May or may not give desired results if hourly labor costs are higher for certain product lines.<\/li>\r\n<\/ul>\r\nWe used a single rate to allocate all of the factory overhead to each product line, but we can also use a single rate for each department:\r\n\r\n<iframe src=\"\/\/plugin.3playmedia.com\/show?mf=6352541&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=-ns-TJApUlk&amp;video_target=tpm-plugin-f2j6ed6a--ns-TJApUlk\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe>\r\n\r\nYou can view the <a href=\"https:\/\/oerfiles.s3.us-west-2.amazonaws.com\/Managerial+Accounting\/Transcripts\/AllocatingSupportCostsUsingTheSingleRateMethod_transcript.txt\" target=\"_blank\" rel=\"noopener\">transcript for \"Allocating Support Costs using the Single Rate Method\" here (opens in new window)<\/a>.\r\n\r\nWe\u2019ll study how this works in the next section, but first check your understanding of using a single rate to allocate fixed manufacturing overhead to products.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\n[ohm_question hide_question_numbers=1]218829[\/ohm_question]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Allocate manufacturing overhead to cost objects using a single, plant-wide rate<\/li>\n<\/ul>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-medium wp-image-1634 alignright\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/13224524\/claudio-schwarz-purzlbaum-0NokUjOSEso-unsplash-300x200.jpg\" alt=\"Many different colored purses hanging on a wall\" width=\"300\" height=\"200\" \/>Once we have determined our allocation rate, we apply that rate to each product or product line in order to assign costs to individual items or batches.<\/p>\n<h2>Allocating Based on Direct Machine Hours<\/h2>\n<p>In our example, Yore Company\u2019s automated process turns out a basic purse every nine hours, but the more complicated deluxe purse takes 32.5 hours of machine time. Our machines will run for 28,800 hours to produce 3,200 basic purses (9 * 3,200) and another 18,200 hours to produce 560 deluxe purses (32.5 * 560) for a total of 47,000 hours. Imagine 65 machines running 24 hours a day. Forty of them are producing nothing but basic purses and the other 25 are producing deluxe purses.<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<tbody>\n<tr>\n<td>Allocate fixed manufacturing overhead using a plant-wide overhead allocation rate based on direct-machine hours:<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Formula for allocating fixed overhead:<\/td>\n<td><\/td>\n<td>allocation rate<\/td>\n<td>times<\/td>\n<td>direct machine hours<\/td>\n<td>equals<\/td>\n<td>overhead allocated to individual product<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Allocation to Basic Purse product line<\/td>\n<td><\/td>\n<td>$4.000<\/td>\n<td>X<\/td>\n<td>28,800<\/td>\n<td>=<\/td>\n<td>$115,200.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Allocation to Deluxe Purse product line<\/td>\n<td><\/td>\n<td>$4.000<\/td>\n<td>X<\/td>\n<td>18,200<\/td>\n<td>=<\/td>\n<td>$72,800.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0 \u00a0 \u00a0 \u00a0 Total allocation base<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span> $188,000.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td>total fixed overhead to be allocated<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>The standard overhead rate based on direct machine hours (DMH) would be $4.00 per machine-hour ($188,000\/47,000 machine-hours). Based on that rate, we would allocate $36.00 to each basic purse ($4\/DMH * 9 hours) and $130.00 to each deluxe purse ($4\/DMH * 32.5 hours).<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<tbody>\n<tr>\n<td>Determine the per-unit costs for each product<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Formula used to allocate overhead to individual products<\/td>\n<td>overhead allocated to product lines<\/td>\n<td>divided by<\/td>\n<td># of units produced<\/td>\n<td>equals<\/td>\n<td>overhead allocated to individual product<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Allocation to Basic Purses<\/td>\n<td>$115,200.000<\/td>\n<td>\/<\/td>\n<td>3,200<\/td>\n<td>=<\/td>\n<td>$36.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Allocation to Deluxe Purses<\/td>\n<td>\u00a0 $72,800.000<\/td>\n<td>\/<\/td>\n<td>560<\/td>\n<td>=<\/td>\n<td>$130.00<\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>The full cost of each purse would be:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<tbody>\n<tr>\n<th scope=\"col\">Single Allocation Rate (DMH)<\/th>\n<th class=\"r\" scope=\"col\">Basic<\/th>\n<th class=\"r\" scope=\"col\">Deluxe<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>\u00a0 Direct Materials<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 100.00<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 210.00<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Direct Labor*<\/td>\n<td class=\"r\">82.50<\/td>\n<td class=\"r\">200.00<\/td>\n<\/tr>\n<tr>\n<td class=\"highlight\">\u00a0 Manufacturing Overhead<\/td>\n<td class=\"r highlight\">\u00a0 36.00<\/td>\n<td class=\"r highlight\">130.00<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Per unit cost<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 218.50<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 540.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p style=\"padding-left: 30px;\">* basic = 4.125 hours * $20\/hour, deluxe = 10 hours * $20\/hour<\/p>\n<p>This would result in a gross profit per unit of:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<tbody>\n<tr>\n<th scope=\"col\">Single Allocation Rate (DMH)<\/th>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\"><\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Sales Price<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 245.00<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 515.00<\/td>\n<\/tr>\n<tr>\n<td>Less: Direct Variable Costs<\/td>\n<td class=\"r\">182.50<\/td>\n<td class=\"r\">410.00<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>62.50<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>105.00<\/td>\n<\/tr>\n<tr>\n<td>Less: Allocated Fixed Costs<\/td>\n<td class=\"r\">36.00<\/td>\n<td class=\"r\">130.00<\/td>\n<\/tr>\n<tr>\n<td>Gross profit per unit<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 26.50<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 (25.00)<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>To check our work, let\u2019s multiply the gross profit per purse by unit sales to compute total gross profit by product line and by total:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\">Basic<\/th>\n<th class=\"r\" scope=\"col\">Deluxe<\/th>\n<th class=\"r\" scope=\"col\"><\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Gross profit per unit<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 26.50<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 (25.00)<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Times number of units sold<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 3,200<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 560<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Total gross profit<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 $\u00a0 \u00a0 \u00a0 84,800<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 \u00a0 $ \u00a0 (14,000)<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Total gross profit &#8211; basic<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">$ \u00a0 84,800.00<\/td>\n<\/tr>\n<tr>\n<td>Total gross profit &#8211; deluxe<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">(14,000.00)<\/td>\n<\/tr>\n<tr>\n<td>Total gross profit, all products<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 70,800.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<\/div>\n<p>Notice that under this allocation method, using direct machine hours instead of units, we have a dramatically different outcome. Under this allocation method, it looks like the deluxe purse is actually losing money.<\/p>\n<h2>Allocating Based on Direct Labor<\/h2>\n<p>Let\u2019s say we consider our operation to be labor-intensive rather than capital-intensive (automated). In that case, we might choose to allocate fixed overhead based on direct labor hours (DLH) or direct labor dollars (DL$). If our standard direct labor cost is the same for both purses, these two calculations will produce the same results, so in this lesson, we\u2019ll use DL$. However, if workers producing deluxe purses are more highly paid than workers producing basic purses, the outcome between the two direct labor methods would be different.<\/p>\n<p>Let\u2019s review our standard costs again:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table gridded\">\n<tbody>\n<tr>\n<th scope=\"col\"><\/th>\n<th scope=\"col\">Basic<\/th>\n<th scope=\"col\">Deluxe<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Planned production<\/td>\n<td class=\"r\">3,200<\/td>\n<td class=\"r\">560<\/td>\n<\/tr>\n<tr>\n<td>Standard\/Budget to make one purse<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Direct Machine Hours<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 9.000<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 32.500<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Direct Labor Hours<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 4.125<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 10.000<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Direct Labor Cost per Hour<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 20.00<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 20.00<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Direct Materials<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 100.00<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 210.00<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<\/div>\n<p>Workers turn out a basic purse every 4.125 hours, but the more complicated deluxe purse takes 10 hours of labor. Our line workers put in 13,200 hours to produce 3,200 basic purses (4.125 * 3,200) and another 5,600 hours to produce 560 deluxe purses (10 * 560) for a total of 18,800 hours. This would be 78 laborers working in three shifts, running the machines and finishing the products by hand, 24 hours a day (26 direct labor workers each shift). Eighteen of those laborers are working on basic purses, and 8 are working on deluxe.<\/p>\n<p>At a standard rate of $20 for wages and benefits, the Direct Labor Dollars for basic and deluxe purses will be $264,000 and $112,000, respectively (13,200 hours * $20\/hour = $264,000, and 5,600 hours * $20\/hour = $112,000) for a total DL$ base of $376,000.<\/p>\n<p>A standard overhead rate based on direct labor dollars (DL$) would be $0.50 per DL$ ($188,000\/376,000). Based on that rate, we would allocate $41.25 to each basic purse ($0.50\/DL$ * $82.50\/purse) and $100.00 to each deluxe purse ($0.50\/DL$ * $200.00\/purse).<\/p>\n<p>The full cost of each purse would be:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<tbody>\n<tr>\n<th scope=\"col\">Single Allocation Rate (DL$)<\/th>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\"><\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>\u00a0 Direct Materials<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 100.00<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 210.00<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Direct Labor<\/td>\n<td class=\"r\">82.50<\/td>\n<td class=\"r\">200.00<\/td>\n<\/tr>\n<tr>\n<td class=\"highlight\">\u00a0 Manufacturing Overhead<\/td>\n<td class=\"r highlight\">41.25<\/td>\n<td class=\"r highlight\">100.00<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 Per unit cost<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 223.75<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 510.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>This would result in a gross profit per unit of:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<tbody>\n<tr>\n<th scope=\"col\">Single Allocation Rate (DL$)<\/th>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\"><\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Sales Price<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 245.00<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 515.00<\/td>\n<\/tr>\n<tr>\n<td>Less: Direct Variable Costs<\/td>\n<td class=\"r\">182.50<\/td>\n<td class=\"r\">410.00<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>62.50<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>105.00<\/td>\n<\/tr>\n<tr>\n<td>Less: Allocated Fixed Costs<\/td>\n<td class=\"r\">41.25<\/td>\n<td class=\"r\">100.00<\/td>\n<\/tr>\n<tr>\n<td>Gross profit per unit<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 21.25<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 5.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>To check our work, let\u2019s multiply the gross profit per purse by unit sales to compute total gross profit by product line and by total:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\">Basic<\/th>\n<th class=\"r\" scope=\"col\">Deluxe<\/th>\n<th class=\"r\" scope=\"col\"><\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Gross profit per unit<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 21.25<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 5.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Times number of units sold<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 3,200<\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 560<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Total gross profit<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 $\u00a0 68,000<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 \u00a0 \u00a0 $ \u00a0 \u00a0 \u00a0 2,800<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Total gross profit &#8211; basic<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">$ \u00a0 68,000.00<\/td>\n<\/tr>\n<tr>\n<td>Total gross profit &#8211; deluxe<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">$ \u00a0 \u00a0 2,800.00<\/td>\n<\/tr>\n<tr>\n<td>Total gross profit, all products<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 70,800.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>Notice that the total gross profit remains the same no matter how we allocated fixed manufacturing overhead to product lines. What is changing is the gross profit for each type of product.<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>Yore Company<br \/>\nIncome Statement (full absorption)<br \/>\nFor the month ending October 31, 20XX<\/caption>\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Amount<\/th>\n<th scope=\"col\">Amount<\/th>\n<th scope=\"col\">Total<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Sales<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">$ 1,072,400.00<\/td>\n<\/tr>\n<tr>\n<td colspan=\"4\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>\u00a0\u00a0\u00a0Variable manufacturing costs<\/strong><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct Materials, basic<\/td>\n<td class=\"r\">$ \u00a0 \u00a0 320,000<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct Labor, basic<\/td>\n<td class=\"r\">264,000<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Total direct costs, basic<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r\">584,000.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct Materials, deluxe<\/td>\n<td class=\"r\">117,600<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct Labor, deluxe<\/td>\n<td class=\"r\">112,000<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Total direct costs, deluxe<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r\">229,600.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0Fixed manufacturing costs<\/td>\n<td><\/td>\n<td class=\"r\">188,000.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Cost of Goods Manufactured and Sold<\/td>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r\">1,001,600.00<\/td>\n<\/tr>\n<tr>\n<td>Gross Profit<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>70,800.00<\/td>\n<\/tr>\n<tr>\n<td colspan=\"4\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Selling, General, and Administrative Costs<\/strong><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0Variable Selling, General, and Administrative<\/td>\n<td><\/td>\n<td class=\"r\">18,800.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0Fixed Selling, General, and Administrative<\/td>\n<td><\/td>\n<td class=\"r\">35,600.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Total Selling, General, and Administrative<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">54,400.00<\/td>\n<\/tr>\n<tr>\n<td>Net income from operations<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 16,400.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>Here is a recap of our results so far:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\">Basic<\/th>\n<th class=\"r\" scope=\"col\">Deluxe<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td class=\"highlight\" colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Simple Average (total fixed manufacturing overhead divided by number of units)<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Sales Price<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 245.00<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 515.00<\/td>\n<\/tr>\n<tr>\n<td>Less: Direct Variable Costs<\/td>\n<td class=\"r\">182.50<\/td>\n<td class=\"r\">410.00<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>62.50<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>105.00<\/td>\n<\/tr>\n<tr>\n<td>Less: Allocated Fixed Costs<\/td>\n<td class=\"r\">50.00<\/td>\n<td class=\"r\">50.00<\/td>\n<\/tr>\n<tr>\n<td class=\"highlight\">Gross profit per unit<\/td>\n<td class=\"r highlight line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 12.50<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r highlight line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 55.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td class=\"highlight-red\" colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Single Allocation Rate (DMH)<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Sales Price<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 245.00<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 515.00<\/td>\n<\/tr>\n<tr>\n<td>Less: Direct Variable Costs<\/td>\n<td class=\"r\">182.50<\/td>\n<td class=\"r\">410.00<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>62.50<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>105.00<\/td>\n<\/tr>\n<tr>\n<td>Less: Allocated Fixed Costs<\/td>\n<td class=\"r\">36.00<\/td>\n<td class=\"r\">130.00<\/td>\n<\/tr>\n<tr>\n<td class=\"highlight-red\">Gross profit per unit<\/td>\n<td class=\"r highlight-red line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 26.50<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r highlight-red line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 (25.00)<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td class=\"highlight-green\" colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Single Allocation Rate (DL$)<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Sales Price<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 245.00<\/td>\n<td class=\"r\">$\u00a0 \u00a0 \u00a0 \u00a0 515.00<\/td>\n<\/tr>\n<tr>\n<td>Less: Direct Variable Costs<\/td>\n<td class=\"r\">182.50<\/td>\n<td class=\"r\">410.00<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>\u00a0 62.50<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>105.00<\/td>\n<\/tr>\n<tr>\n<td>Less: Allocated Fixed Costs<\/td>\n<td class=\"r\">41.25<\/td>\n<td class=\"r\">100.00<\/td>\n<\/tr>\n<tr>\n<td class=\"highlight-green\">Gross profit per unit<\/td>\n<td class=\"r highlight-green line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 21.25<span class=\"u-sr-only\">Double line<\/span><\/td>\n<td class=\"r highlight-green line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 5.00<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<\/div>\n<p>Again, notice that dividing fixed manufacturing overhead by number of units makes the gross profit for the deluxe purse significantly higher than if fixed manufacturing overhead is allocated according to direct labor. By allocating fixed manufacturing overhead by machine hours, the deluxe purse is actually costing more to produce than it is selling for.<\/p>\n<p>Allocating based on a single rate for the entire organization has pros and cons:<\/p>\n<p>Dividing by number of total units of all products:<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Simple.<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">May not accurately reflect the use of resources because it allocates fixed manufacturing overhead evenly over all products.<\/li>\n<\/ul>\n<p>Allocating based on direct machine hours:<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">May be more accurate for automated processes (e.g. where fixed manufacturing overhead includes depreciation on machines, repairs and maintenance, etc.).<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Slightly more complicated than simply dividing fixed manufacturing overhead by number of units of everything produced.<\/li>\n<\/ul>\n<p>Allocating based on direct labor hours:<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">May be more accurate for labor-intensive processes (e.g. where people are doing most of the work by hand).<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Slightly more complicated than simply dividing fixed manufacturing overhead by number of units of everything produced.<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">May or may not give desired results if hourly labor costs are higher for certain product lines.<\/li>\n<\/ul>\n<p>Allocating based on direct labor dollars:<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">May be more accurate for labor-intensive processes (e.g. where people are doing most of the work by hand).<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Slightly more complicated than simply dividing fixed manufacturing overhead by number of units of everything produced.<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\">May or may not give desired results if hourly labor costs are higher for certain product lines.<\/li>\n<\/ul>\n<p>We used a single rate to allocate all of the factory overhead to each product line, but we can also use a single rate for each department:<\/p>\n<p><iframe loading=\"lazy\" src=\"\/\/plugin.3playmedia.com\/show?mf=6352541&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=-ns-TJApUlk&amp;video_target=tpm-plugin-f2j6ed6a--ns-TJApUlk\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe><\/p>\n<p>You can view the <a href=\"https:\/\/oerfiles.s3.us-west-2.amazonaws.com\/Managerial+Accounting\/Transcripts\/AllocatingSupportCostsUsingTheSingleRateMethod_transcript.txt\" target=\"_blank\" rel=\"noopener\">transcript for &#8220;Allocating Support Costs using the Single Rate Method&#8221; here (opens in new window)<\/a>.<\/p>\n<p>We\u2019ll study how this works in the next section, but first check your understanding of using a single rate to allocate fixed manufacturing overhead to products.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p><iframe loading=\"lazy\" id=\"ohm218829\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=218829&theme=oea&iframe_resize_id=ohm218829\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-126\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Allocating Overhead Using a Single, Plant-wide Rate. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Purses. <strong>Provided by<\/strong>: Unsplash. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/unsplash.com\/photos\/0NokUjOSEso\">https:\/\/unsplash.com\/photos\/0NokUjOSEso<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/pdm\">Public Domain: No Known Copyright<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">All rights reserved content<\/div><ul class=\"citation-list\"><li>Allocating Support Costs using the Single Rate Method. <strong>Provided by<\/strong>: Edspira. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/www.youtube.com\/watch?v=-ns-TJApUlk\">https:\/\/www.youtube.com\/watch?v=-ns-TJApUlk<\/a>. <strong>License<\/strong>: <em>All Rights Reserved<\/em>. <strong>License Terms<\/strong>: Standard YouTube License<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":364389,"menu_order":4,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Allocating Overhead Using a Single, Plant-wide Rate\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"copyrighted_video\",\"description\":\"Allocating Support Costs using the Single Rate Method\",\"author\":\"\",\"organization\":\"Edspira\",\"url\":\"https:\/\/www.youtube.com\/watch?v=-ns-TJApUlk\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"Standard YouTube 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