Plant-wide versus departmental overhead

Plant or Factory Wide (Single) Overhead Absorption Rate

Plant or factory wide (single or blanket) rate is used for the whole factory and is assigned to all cost units irrespective of the departments in which they were produced.

Plant-wide overhead absorption rate = (Estimated FOH for the whole factory/ Estimated activity level for the whole factory) *100

Conditions for using plant wide overhead absorption rate:

• All production departments contribute in equal proportion to the fabrication of every product.
• Company produces only one type of product.

The above conditions restrict its usefulness and in the absence of above conditions. This does not produce satisfactory results.

Departmental Overhead Absorption Rate:

In case of departmental overhead absorption rate, separate overhead absorption rates are used for different producing departments. Though use of departmental overhead absorption rate is considered better than using a single (factory wide) overhead absorption rate but it has certain pros and cons which are given below:

Advantages:

• Per unit and total costs of a product can be more accurately.
• Use of separate rates for different departments facilities better control, as the departmental managers being responsible for costs of their respective departments have a closer look on overheads incurred.

Disadvantages:

• The departmental managers often do not have a significant role in the apportionment of overheads.
• This basis used for apportionment of overheads to different departments may not be fair or correct as overheads may not be incurred for the departments in the same way as shown by basis for apportionment.