Question

Please write a short report (not more than 200 words) concerning the allocation of indirect costs using plantwide, department, and ABC rates.

The report should focus on the following: The nature of eachadvantages and disadvantages.

The question is on the site. I want an answer that differs from the previous question

Thank you ِ

Abdul-rahim Taysir

Answer 1

There are three methods to allocate indirect costs and they are

1) Plant wide : A plant-wide overhead rate is a single rate used to assign or allocate all of a company's manufacturing overhead costs to its production output.Using a plant-wide rate is logical when there is one root cause of the indirect production costs and the company manufactures similar products. On the other hand, if the company manufactures diverse products, some of which use expensive equipment while some use only inexpensive equipment, a plant-wide rate is not appropriate.

2) Departmental overhead rate: The departmental overhead rate is an expense rate calculated for each department in a factory production process.

Departmental allocation is more streamlined and easier to measure without a detailed tracking system.

The departmental overhead rate will skew when each department is responsible for multiple products varying in labor and machine hours. This is likely to occur when departments are large. This also creates redundancy since each department must measure and calculate its respective rate.

3) ABC : Activity-based costing involves allocating and determining overhead based on the functions being performed. These functions can span multiple products, but they must be similar in nature.

ABC brings accuracy and reliability in product cost determination by focusing on cause and effect relationship in the cost incurrence.

For a large organization, tracking each individual function is costly and complex.