Cost Accounting Chapter 4: Accounting for Factory Overhead Subtopic: Departmental Rate and Plantwide Rate by Resty Labayo

1. DEPARTMENTAL
RATE AND
PLANTWIDE
RATE

2. Manufacturing companies normally has two or
more production departments that convert the raw
materials into a finished product. The production
technology may differ in each department so that
one department maybe highly automated using
machines in its operation while the other utilizes
mostly manpower. Because of this, the use of
departmental rates (one overhead rate per
department) is recommended to allow each
department to select the most appropriate measure
of activity relative to its operation. This method
provides more accurate product costing
considering that manufacturing overhead incurred
includes various overhead costs that vary greatly
in their relationship to the production process.

3. Illustration: Job Costing using Plant wide rate and
Departmental Rate.
Sunflower Manufacturing Company has two producing
departments, Assembly and Finishing Department.
Assembly Department has significant amount of labor
related overhead and it uses direct labor hours as the
cost driver while Finishing Department has significant
amount of machine-related overhead and it uses
machine hours as the cost driver.

4. The following data are available for Sunflower
Manufacturing Company for the year just ended:
Budget Data Assembly Finishing
Manufacturing overhead
Direct labor Hours
Machine hours
Actual data:
DM used per unit
Direct labor costs per unit
Machine time used per unit
Actual production, 25,000 units
P1,890,000
52,000
15,000
P120
2hr@ P37.50/hr
30 min.
P1,260,000
20,000
80,000
P50
.75hr@ P37.50/hr
3hrs.

5. Required: Determine the total cost of producing the 25,000 units assuming (a)
plant wide rate based on direct labor hours and (b) department rates.
Solutions:
(a) Production costs of 25,000 units using
Plant wide rate based on direct labor hours.
Cost Element
DM
DL
FOH
Total costs
Assembly
P3,000,000.00
1,875,000.00
2,187,500.00
P7,062,500.00
Finishing
P1,250,000.00
703,125.00
820,312.50
P2,773,437.50
Total
P4,250,000.00
2,578,125.00
3,007,812.00
P9,835,937.50
Overhead rate = P1,890,000 + 1,260,000 = P43.75/DLH
72,000 DLHs

6. Overhead applied:
OH in Assembly 25,000 x 2 x 43.75 = P2,187,500
OH in Finishing 25,000 x .75 x 43.75 = P820,312.50
(b) Production costs using departmental rate: Assembly
Dept. uses DLH while Finishing Dept. uses MH
Cost Elements Assembly Finishing Total
DM costs P3,000,000.00 P1,250,000.00 P4,250,000.00
DL costs 1,875,000.00 703,125.00 2,578,125.00
Overhead* 1,817,500.00 1,181,250.00 2,998,750.00
Total costs P6,692,500.00 P3,134,375.00 P9,826,875.00

7. Overhead Rates
Assembly Finishing
P1,890,000/52,000 DLH P36.35/DLH
P1,260,000/80,000 MH P15.75/MH
Overhead applied
Assembly Finishing
25,000 x 2DLhrs x 36.35 P1,817,500
25,000 x 3 MH x 15.75
P1,181,250