The Main Advantage Of The Plantwide Overhead Rate Method

Introduction

In the world of manufacturing, determining the cost of producing a product is crucial for the profitability of a company. One way to calculate the cost is by using the plantwide overhead rate method. This method has been used for decades, and it has several advantages that make it a popular choice for many manufacturers.

What is Plantwide Overhead Rate Method?

The plantwide overhead rate method is a costing technique used to allocate overhead costs to products. It involves the use of a single overhead rate for the entire factory, which is based on the total budgeted overhead costs and the estimated activity level. This method assumes that all products consume overhead costs in the same proportion.

The Main Advantage of Plantwide Overhead Rate Method

The main advantage of the plantwide overhead rate method is its simplicity. This method is easy to understand and implement, making it a popular choice for small to medium-sized manufacturers. It saves time and resources, as there is no need to allocate overhead costs to individual products, which can be a tedious and time-consuming process.

Cost Effective

Another advantage of the plantwide overhead rate method is that it is cost-effective. Since there is only one overhead rate for the entire factory, there is no need to hire additional staff to allocate overhead costs to individual products. This saves money on salaries and benefits, which can be significant for a small business.

Accuracy

Despite its simplicity, the plantwide overhead rate method is also accurate. It provides a reasonable estimate of the overhead costs allocated to each product, which is important for determining the true cost of production. This method is also useful for setting prices, as it ensures that overhead costs are included in the product’s selling price.

Disadvantages of Plantwide Overhead Rate Method

While the plantwide overhead rate method has several advantages, it also has some disadvantages. One disadvantage is that it assumes that all products consume overhead costs in the same proportion. This may not be accurate, as some products may consume more or less overhead costs than others.

Difficulty in Identifying Overhead Costs

Another disadvantage is that it can be difficult to identify which overhead costs are related to each product. This can result in inaccurate cost allocations, which can lead to incorrect pricing and profitability analysis.

Overhead Cost Fluctuations

Lastly, the plantwide overhead rate method is sensitive to changes in overhead costs. If overhead costs fluctuate significantly, the overhead rate may not accurately reflect the true cost of production. This can lead to incorrect pricing and profitability analysis, which can be detrimental to a company’s financial health.

Conclusion

In conclusion, the plantwide overhead rate method is a simple and cost-effective way to allocate overhead costs to products. It is accurate, easy to understand, and useful for setting prices. However, it also has some disadvantages, such as difficulty in identifying overhead costs and sensitivity to fluctuations in overhead costs. Overall, the plantwide overhead rate method is a useful tool for manufacturers, but it should be used in conjunction with other costing techniques to ensure accurate cost allocations.