Which type of overhead rate is particularly useful when different jobs place different demands on different departments?
Select one: a. Standard overhead rate b. Departmental overhead rate c. Plant-wide overhead rate d. Activity-based overhead rate
The correct answer and explanation is:
The correct answer is b. Departmental overhead rate.
Explanation:
The departmental overhead rate is especially useful when different jobs place different demands on various departments within a company. This method involves allocating overhead costs to each department based on the actual usage of resources or activities within that specific department. It acknowledges that each department may have varying levels of overhead costs and that different jobs or products might require different amounts of resources from each department.
For instance, a company may have a manufacturing plant with various departments such as assembly, finishing, and quality control. The assembly department might use a lot of machinery and labor, leading to higher overhead costs in this department, while the finishing department may have fewer resources consumed but may still carry its own set of overhead costs. In such a case, allocating overhead costs using a departmental rate will provide a more accurate cost per job or product.
This method is different from the plant-wide overhead rate, which uses a single rate for the entire plant, regardless of the differing overhead costs in various departments. While the plant-wide rate may be simpler to calculate, it may not accurately reflect the true overhead costs for jobs that primarily involve certain departments. Similarly, standard overhead rates apply preset rates, often based on historical data, and may not take into account the actual demand from different departments. On the other hand, activity-based overhead rate (ABOR) allocates overhead costs based on the specific activities that drive costs, making it an excellent method for more complex cost allocation but also more detailed than the departmental rate.
In summary, the departmental overhead rate is effective for businesses where jobs place varying demands on different departments, ensuring a fairer and more precise allocation of overhead costs.