Multiple Predetermined Overhead Rates:
Learning Objectives of the Article:
- What are multiple predetermined overhead rates?
- What is the need of calculating multiple predetermined overhead rates?
When a single predetermined overhead rate is used for entire factory it is called plant wide overhead rate. This is fairly common practice – particularly in smaller companies. But in large companies, multiple predetermined overhead rates are often used.
In a multiple predetermined overhead rate system, each production department may have its own predetermined overhead rate. Such a system, while more complex, is considered to be more accurate. Since it can reflect differences across departments in how overhead costs are incurred. For example, overhead might be allocated based on machine-hours in departments that are relatively machine intensive. When multiple predetermined overhead rates are used, overhead is applied in each department according to its own overhead rate as a job proceeds through the department.
Enhancing the Accuracy of Product Costs
Only 34% of surveyed manufacturing firms reported that they used a single, plant wide overhead rate. The use of multiple overhead rates to obtain more accurate product costs was reported by 44% of the firms. The remaining 22% use activity based costing–an even more complex, and presumably more accurate, approach to the allocation of overhead costs to products.
Source: Eun-Sup Shim and Joseph M. Larkin, “A survey of current managerial accounting practices: Where do we stand,” Ohio CPA Journal, February 1994, p. 21 (4pages).
You may also be interested in other useful articles from “job order costing system” chapter:
- Measuring Direct Materials Cost in Job Order Costing System
- Measuring Direct Labor Cost in Job Order Costing System
- Application of Manufacturing Overhead
- Job Order Costing System – The Flow of Costs
- Multiple Predetermined Overhead Rates
- Under-applied overhead and over-applied overhead calculation
- Disposition of any balance remaining in the manufacturing overhead account at the end of a period
- Predetermined Overhead Rate and Capacity
- Recording Non-manufacturing Costs
- Recording Cost of Goods Manufactured and Sold
- Job Order Costing in Services Companies
- Use of Information Technology in Job Order Costing
- Advantages and Disadvantages of Job Order Costing System
- Job Order Costing Discussion Questions and Answers
- Job Order Costing Exercises
- Case Studies