{"id":128,"date":"2021-01-26T22:11:36","date_gmt":"2021-01-26T22:11:36","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&p=128"},"modified":"2021-08-15T20:06:04","modified_gmt":"2021-08-15T20:06:04","slug":"introduction-to-multiple-base-system","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/chapter\/introduction-to-multiple-base-system\/","title":{"raw":"Introduction to Multiple-base System","rendered":"Introduction to Multiple-base System"},"content":{"raw":"

What you will learn to do: allocate manufacturing overhead using multiple allocation bases and rates<\/h2>\r\n\"CloseThe 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 \u201cone-size-fits-all\u201d approach may not be as accurate as other more targeted methods of allocating fixed manufacturing overhead.\r\n\r\nFor instance, let\u2019s 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.\r\n\r\nUsing a single overhead rate, we determined the following overhead allocation options:\r\n
    \r\n \t
  1. Total overhead divided by total units ($188,000 \/ 3,760) = $50 per unit, both basic and deluxe<\/li>\r\n \t
  2. Total overhead divided by machine hours ($188,000 \/ 47,000) = $4 per machine hour<\/li>\r\n \t
  3. Total overhead divided by direct labor hours ($188,000 \/ 18,800) = $10 per labor hour<\/li>\r\n \t
  4. Total overhead divided by direct labor dollars ($188,000 \/ $376,000) = $0.50 per labor dollar<\/li>\r\n<\/ol>\r\nSince Yore Company pays all of its employees at the same rate ($20 standard labor cost), allocating based on direct labor hours or direct labor dollars will yield the same result.\r\n\r\nAllocating fixed manufacturing overhead evenly across all units resulted in the following cost per unit:\r\n
    \r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    <\/th>\r\nBasic<\/th>\r\nDeluxe<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n
    \u00a0 Direct Materials<\/td>\r\n$\u00a0 \u00a0 \u00a0 \u00a0 100.00<\/td>\r\n$\u00a0 \u00a0 \u00a0 \u00a0 210.00<\/td>\r\n<\/tr>\r\n
    \u00a0 Direct Labor<\/td>\r\n\u00a0 82.50<\/td>\r\n200.00<\/td>\r\n<\/tr>\r\n
    \u00a0 Manufacturing Overhead<\/td>\r\n50.00<\/td>\r\n50.00<\/td>\r\n<\/tr>\r\n
    \u00a0 Per unit cost<\/td>\r\nSingle Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 232.50Double line<\/span><\/td>\r\nSingle Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 460.00Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n \r\n\r\nAllocating fixed manufacturing overhead by direct machine hours resulted in the following cost per unit:\r\n
    \r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Single Allocation Rate (DMH)<\/th>\r\nBasic<\/th>\r\nDeluxe<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n
    \u00a0 Direct Materials<\/td>\r\n$\u00a0 \u00a0 \u00a0 \u00a0 100.00<\/td>\r\n$\u00a0 \u00a0 \u00a0 \u00a0 210.00<\/td>\r\n<\/tr>\r\n
    \u00a0 Direct Labor<\/td>\r\n82.50<\/td>\r\n200.00<\/td>\r\n<\/tr>\r\n
    \u00a0 Manufacturing Overhead<\/td>\r\n\u00a0 36.00<\/td>\r\n130.00<\/td>\r\n<\/tr>\r\n
    \u00a0 Per unit cost<\/td>\r\nSingle Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 218.50Double line<\/span><\/td>\r\nSingle Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 540.00Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n \r\n\r\nAllocating fixed manufacturing overhead by direct labor cost or direct labor hours resulted in the following cost per unit:\r\n
    \r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Single Allocation Rate (DMH)<\/th>\r\nBasic<\/th>\r\nDeluxe<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n
    \u00a0 Direct Materials<\/td>\r\n$\u00a0 \u00a0 \u00a0 \u00a0 100.00<\/td>\r\n$\u00a0 \u00a0 \u00a0 \u00a0 210.00<\/td>\r\n<\/tr>\r\n
    \u00a0 Direct Labor<\/td>\r\n82.50<\/td>\r\n200.00<\/td>\r\n<\/tr>\r\n
    \u00a0 Manufacturing Overhead<\/td>\r\n\u00a0 41.25<\/td>\r\n100.00<\/td>\r\n<\/tr>\r\n
    \u00a0 Per unit cost<\/td>\r\nSingle Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 223.75Double line<\/span><\/td>\r\nSingle Line<\/span>$\u00a0 \u00a0 \u00a0 \u00a0 510.00Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n \r\n\r\nLet\u2019s assume that upper management is interested in the most accurate representation of cost for each purse.\r\n\r\nHow 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.\r\n\r\nAccountants 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.\r\n\r\nIn this section, you will learn how to use multiple rates based on departments to determine overhead allocations.\r\n\r\nWhen you are done with this section, you will be able to:\r\n