The plantwide overhead rate formula is a cost accounting technique used to calculate the cost of overhead for a manufacturing plant. The formula takes into account four key entities: factory overhead, activity base, total factory unit cost, and product cost. Factory overhead includes all costs that are not directly related to production, such as utilities, rent, and depreciation. The activity base is a measure of the activity that is causing the overhead costs, such as direct labor hours or machine hours. The total factory unit cost is the total cost of production, divided by the number of units produced. The product cost is the sum of the direct materials, direct labor, and overhead costs allocated to each unit of production.
Best Structure for Plantwide Overhead Rate Formula
The plantwide overhead rate formula is used to allocate overhead costs to products or services. The formula is:
Overhead rate = Total overhead costs / Total activity base
The total overhead costs are the indirect costs of production that cannot be directly traced to a specific product or service. These costs can include rent, utilities, insurance, and salaries of administrative staff.
The total activity base is the total amount of activity that is used to produce the products or services. This activity can be measured in terms of direct labor hours, machine hours, or units produced.
The overhead rate is a percentage that is used to allocate overhead costs to products or services. The overhead rate is applied to the total activity base for each product or service to determine the amount of overhead costs that are allocated to that product or service.
The plantwide overhead rate formula is a simple and straightforward formula to use. However, there are a few things to keep in mind when using this formula:
- The total overhead costs should be allocated to all of the products or services that are produced using the overhead costs.
- The total activity base should be a measure of the activity that is used to produce the products or services.
- The overhead rate should be applied to the total activity base for each product or service to determine the amount of overhead costs that are allocated to that product or service.
The following is a table that shows an example of a plantwide overhead rate formula:
| Overhead Cost | Total |
|---|---|
| Rent | $10,000 |
| Utilities | $5,000 |
| Insurance | $2,000 |
| Salaries of administrative staff | $15,000 |
| Total overhead costs | $32,000 |
| Activity Base | Total |
|---|---|
| Direct labor hours | 10,000 |
| Machine hours | 5,000 |
| Units produced | 100,000 |
| Total activity base | 115,000 |
| Overhead Rate | Calculation |
|---|---|
| Overhead rate | $32,000 / 115,000 |
| Overhead rate | 0.2783 |
The overhead rate is 0.2783. This means that for every $1 of activity, $0.2783 of overhead costs will be allocated to the product or service.
Question 1: What is the formula for calculating plantwide overhead rate?
Answer:
The plantwide overhead rate formula is:
- Plantwide overhead rate = Total plantwide overhead costs / Total activity base
- Entity: Plantwide overhead rate
- Attributes: Calculated using Total plantwide overhead costs and Total activity base
Question 2: What overhead costs are included in the plantwide overhead rate?
Answer:
Overhead costs included in the plantwide overhead rate are:
- Indirect materials
- Indirect labor
- Utilities
- Rent
- Depreciation on plant assets
- Insurance
- Property taxes
- Administrative costs
- Other indirect costs that cannot be traced to specific products or departments
Question 3: How is the activity base determined for the plantwide overhead rate?
Answer:
The activity base for the plantwide overhead rate is the measure of activity that most closely relates to the incurrence of overhead costs, such as:
- Direct labor hours
- Machine hours
- Production units
- Square footage of production area
-
Number of orders processed
-
Entity: Activity base
- Attributes: Measure of activity related to overhead costs, varies based on context
Well, that’s the lowdown on plantwide overhead rates. It might not be the most scintillating topic, but it’s a crucial part of understanding your business’s finances. Thanks for sticking with me until the end. If you have any more burning questions, feel free to drop by again soon. I’ll always be happy to dish out a healthy dose of accounting knowledge. Cheers!