A single plantwide factory overhead rate is used to allocate overhead costs to products. It is an integral part of the process of cost accounting, which helps companies determine the cost of their products and services accurately.
What is a Single Plantwide Factory Overhead Rate?
A single plantwide factory overhead rate is a predetermined overhead rate used to allocate manufacturing overhead costs to products. The rate is calculated by dividing the total estimated manufacturing overhead costs by the estimated total amount of the allocation base (i.e., the activity level). In other words, it is the total amount of factory overhead costs divided by the total amount of the allocation base.
The single plantwide factory overhead rate is called a “plantwide” rate because it applies the same overhead rate to all products manufactured in the same plant. This method of allocation is simple and easy to use, making it popular among small businesses with homogeneous product lines.
How to Calculate Single Plantwide Factory Overhead Rate?
Calculating the single plantwide factory overhead rate involves several steps:
Step 1: Determine the total estimated manufacturing overhead costs.
The first step is to determine the total estimated manufacturing overhead costs for the period. These costs include indirect materials, indirect labor, rent, utilities, depreciation, insurance, and other indirect expenses.
Step 2: Determine the estimated total amount of the allocation base.
The allocation base is the activity that drives the overhead costs. The most common allocation base used in manufacturing is machine hours, direct labor hours, or direct materials cost. Determine the estimated total amount of the allocation base for the period. For example, if the allocation base is machine hours, estimate the total number of machine hours for the period.
Step 3: Calculate the single plantwide factory overhead rate.
Divide the total estimated manufacturing overhead costs by the estimated total amount of the allocation base to get the single plantwide factory overhead rate. For example, if the estimated total manufacturing overhead costs are $500,000, and the estimated total amount of machine hours is 50,000, the single plantwide factory overhead rate would be $10 per machine hour ($500,000 / 50,000).
Step 4: Apply the overhead rate to products.
Once you have determined the single plantwide factory overhead rate, you can apply it to the products manufactured in the plant. Multiply the overhead rate by the actual amount of the allocation base used for each product to allocate the overhead costs to each product. For example, if Product A requires 10 machine hours, the total overhead cost allocated to Product A would be $100 ($10 x 10).
For other methods of allocating overhead, check out this article: https://accountinghowto.com/how-is-factory-overhead-allocated/
Conclusion
Calculating the single plantwide factory overhead rate is an important step in allocating overhead costs to products. This method of allocation is easy to use and is suitable for small businesses with homogeneous product lines. However, it has limitations, such as inaccurate product costs, which can result in mispricing and lost profits. Therefore, companies should consider more sophisticated methods of allocating overhead costs, such as activity-based costing, for more accurate and reliable cost information.