What is multiple production department factory overhead rate method?

Multiple Production Department Factory Overhead RateMethod Performance Gloves, Inc. produces three sizes ofsports gloves: small, medium, and large. A glove pattern isfirst stenciled onto leather in the Pattern Department. Thestenciled patterns are then sent to the Cut and SewDepartment, where the glove is cut and sewed together.Performance Gloves uses the multiple production departmentfactory overhead rate method of allocating factory overheadcosts. Its factory overhead costs were budgeted as follows:Pattern Department overhead $115,600 Cut and SewDepartment overhead 189,000 Total $304,600 The directlabor estimated for each production department was asfollows: Pattern Department 1,700 direct labor hours Cut andSew Department 2,100 Total 3,800 direct labor hours Directlabor hours are used to allocate the production departmentoverhead to the products. The direct labor hours per unit foreach product for each production department were obtained

Single Plantwide and Multiple Production Department Factory Overhead Rate Methods and Product Cost Distortion

Eclipse Motor Company manufactures two types of specialty electric motors, a commercial motor and a residential motor, through two production departments, Assembly and Testing. Presently, the company uses a single plantwide factory overhead rate for allocating factory overhead to the two products. However, management is considering using the multiple production department factory overhead rate method. The following factory overhead was budgeted for Eclipse:

a.  Determine the per-unit factory overhead allocated to the commercial and residential motors under the single plantwide factory overhead rate method, using direct machine hours as the allocation base.

b.  Determine the per-unit factory overhead allocated to the commercial and residential motors under the multiple production department factory overhead rate method, using direct machine hours as the allocation base for each department.

c.  Recommend to management a product costing approach, based on your analyses in (a) and (b).

1. The management should consider multiple production department factory overhead rate methods, because this method calculates the cost more accurately and considers the fact that commercial products use more costly overheads than residential products.

2. The management should consider single plantwide factory overhead rate methods, because this method calculates the cost more accurately and considers the fact that the overheads are applied evenly based on the direct labor hours.

3. The management could consider either multiple production department factory overhead rate method or the single plantwide rate, as both these methods have the same effect on the final costs.

What Is the Departmental Overhead Rate?

The departmental overhead rate is an expense rate calculated for each department in a factory production process. The departmental overhead rate is different at every stage of the production process when various departments perform selected steps to complete the final process.

By breaking up overhead costs for individual business sections rather than having a company-wide rate, management can assess corporate inefficiencies more accurately and take more specific action.

What Does the Departmental Overhead Rate Tell You?

An overhead rate, in managerial accounting, is an additional cost added on to the direct costs of production in order to more accurately assess the profitability of each product. To allocate these costs, an overhead rate is applied that spreads the overhead costs around depending on how much resources a product or activity used.

For example, overhead costs may be applied at a set rate based on the number of machine hours required for the product. In more complicated cases, a combination of several cost drivers may be used to approximate overhead costs.

The departmental overhead rate is specific to every segregated step in the entire process. For example, if a company makes bread, different departmental rates could be used for the actual production/manufacturing line and the bagging process.

Cost-cutting, efficiency and productivity are standard elements of a strong corporate performance methodology. Analysis and benchmarking of departmental overhead rates is an effective way to measure success. Comparisons between competitors, as well as among various internal departments help isolate efforts that are adding value, and those that are destroying enterprise value.

No two cost-cutting approaches are the same. Like all things in business, there are pros and cons to the myriad of strategies businesses can utilize. However, by following trends in departmental rates, patterns do emerge highlighting the delicate balance of short-term goals with long-term business requirements.

Determining Departmental Overhead Rates

Determining appropriate departmental rates is an area addressed by managerial accounting methods. Managerial accounting is the process of identifying, measuring, analyzing, interpreting and communicating information for the pursuit of an organization's goals.

This branch of accounting is also known as cost accounting. The key difference between managerial and financial accounting is managerial accounting information is aimed at helping managers within the organization make decisions, while financial accounting is aimed at providing information to parties outside the organization.

In managerial accounting, rather than using one overhead rate to allocate all of the overhead costs, overhead costs can be broken down by departments. Departmental overhead rates offer the flexibility to use a different activity or cost driver for each department. Often, some departments will rely heavily on manual labor while others require more machinery. Direct labor hours can be important to certain departments but machine hours might work better for others.

How do multiple production department and the single plantwide factory overhead rate method differ?

What are the three overhead rate methods?

How do you calculate departmental overhead rate?

What is departmental overhead rate?