DEPARTMENTAL RATE AND

PLANTWIDE RATE

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.

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.

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.

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

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

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