The multiple production department method and the single plantwide factory overhead

 

The multiple production department method and the single plantwide factory overhead rate method are two different approaches to allocate overhead costs in manufacturing companies. Let’s explore the key differences between these methods:

Multiple Production Department Method:
Separate Overhead Rates: In this method, each production department is assigned its own overhead rate. The overhead rate is calculated by dividing the department’s total overhead costs by a suitable cost driver specific to that department, such as direct labor hours or machine hours.

Departmental Allocation: Overhead costs are allocated to each department based on its respective cost driver. This ensures that overhead costs are proportionally assigned to each department based on the activity level of that department.

Departmental Control: The multiple production department method allows for greater control and monitoring of costs at the departmental level. Each department is responsible for managing its own overhead costs and can make adjustments and improvements specific to its operations.

Complexity: Implementing and managing multiple departmental rates can be more complex and time-consuming. It requires tracking and allocating costs separately for each department, which may increase administrative burdens and the risk of errors.

Accurate Departmental Costing: This method provides more accurate costing information at the departmental level, allowing for better decision-making within each department based on its specific cost structure.

Single Plantwide Factory Overhead Rate Method:
Single Overhead Rate: In this method, a single overhead rate is calculated for the entire factory by dividing the total factory overhead costs by a suitable cost driver that represents the overall factory activity, such as machine hours or direct labor hours.

Plantwide Allocation: Overhead costs are allocated to products or departments based on the predetermined single overhead rate. This means that all products or departments share the same rate, regardless of their specific characteristics or activities.

Simplicity: The single plantwide factory overhead rate method offers simplicity in terms of calculations and overhead allocation. It eliminates the need to track and manage separate rates for each department and reduces administrative complexities.

Lack of Specificity: This method assumes that all departments have similar overhead consumption patterns and treats them as homogeneous entities. It may not capture the variations in overhead costs between different departments or products accurately.

Cost Savings: Using a single overhead rate can lead to cost savings in terms of administrative resources, as there is no need to calculate, maintain, and track multiple rates. It streamlines the accounting process and reduces complexity.

Overall Cost Control: The single plantwide factory overhead rate method provides an overall view of overhead costs and allows for cost control at the factory level. However, it may not provide detailed insights into cost drivers and inefficiencies within individual departments.

In summary, the multiple production department method assigns separate rates to each department, allowing for more accurate departmental costing and control. On the other hand, the single plantwide factory overhead rate method simplifies the allocation process, saves costs, but lacks specificity at the departmental level. The choice between these methods depends on factors such as the complexity of operations, the need for accuracy, and the trade-offs between simplicity and detailed costing information.