Question

How does the accuracy of departmental overhead allocation rates compare to a single plant-wide allocation rate?

Departmental overhead allocation rates are more accurate than a single-plantwide rate

Departmental overhead allocation rates have the same accuracy as a single-plantwide rate

Departmental overhead allocation rates are less accurate than a single-plantwide rate

A company has two manufacturing overhead activities: mixing and packaging. The cost driver for mixing is direct labor hours and the cost driver for packaging is units packaged. The following estimates are assumed for next year:

Manufacturing overhead cost related to mixing: $100,000

Manufacturing overhead cost related to packaging: $200,000

Direct labor hours: 100,000 hours

Units packaged: 400,000 units

Under ABC, what is the amount of manufacturing overhead related to packaging that should be allocated to an order that requires 3 direct labor hours to produce 15 units of product?

$10.50

$7.50

$9.00

$11.25

Answer 1

Answer (1) :

The Answer is (a) Departmental overhead allocation rates are more accurate than a single-plantwide rate.

Explanation : Departmental OH rate is more accurate as compared to Single Plantwide OH rate, As the basis in Departmental OH rate is different different according to the major factors Like in Machining Department, Machine Hours may be useful and in Other Department Labor Hours is more useful. While in Single Plantwide OH rate, all OH are allocated on the basis of general basis which may be Machine Hours or Labor Hours irrespective of Departments. Further, the Departments have more accurate data related to OH incurred in thier department. So the Accuracy in Departmental Rate is higher as compare to Single Plantwide OH rate.

Answer (2) :

The Answer is (b) $ 7.50.

Working :

Activity Rate for Packaging               = Overhead of Packaging / Total Units

                                                         = $ 200,000 / 400,000

               = $ 0.50 per Unit   

Packaging OH allocated to Order     = 15 Units * $ 0.50 per Unit

                                                         = $ 7.50.

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