Question 5
The overhead rate is the total of indirect cost for a specific reporting period, divided by an allocation measure. Overhead rate is the percentage that we get after comparing to the total overhead expenses with the total expenses. Overhead rate has differentiate into 2 types which is blanket overhead rate (single overhead rate) and departmental overhead rate. Blanket overhead rate (single overhead rate) is the most simplistic tradisional costing system. It assign indirect cost object by using a single overhead rate for the organization as a whole. Blanket overhead rate can be named as plant-wide rate or single overhead rate. It contain the same meaning within it. The term blanket overhead rate or plant-wide rate are used to describe …show more content…
The total manufacturing overhead for the manufacturing plant of Source Industries Berhad are RM 900,000. The company has selected the direct labour hours as their allocation base for assigning overheads to products. Assuming that the total number of direct labour hours are 90,000 for the period the blanket overhead rate for Source Industries Berhad is RM10 per direct labour hour (RM 900,000/90,000 direct labour hours).
This calculation has classified into two stages. First, overheads are accumulated in one single plant-wide pool for a period of time. Second, a plant-wide rate is computed by dividing the total amount of overheads accumulated (RM 900,000) by the selected allocation base (90,000 direct labour hours). The overhead costs are assigned to products by multiplying the blanket rate by the units of the selected allocation base (direct labour hours) used by each product. Source Industries Berhad is considering establishing separate overheads for each of its three production departments. The products made by the company require different operation and some products do not pass through all three department. These investigations also indicate that the RM 900,000 total product manufacturing and 90,000 direct labour hours can be analysed as …show more content…
To produce a product A requires 20 direct labor hours in department 3, and it does not pass through departments 1 and 2. By using the blanket overhead rate in production, the overhead cost of RM200 (20 hours at RM10 per hour) will be allocate to product A.
Besides, if a department overhead is used, and have a same situation with product A which department 3 is used and does not pass through department 1 and 2. There is only RM100 (20 hours at RM5 per hour) will be allocated to product A.
By comparing to two different overhead rate, we can realize that the department overhead rate is more accurate compared to the blanket overhead rate. This is because for the blanket overhead rate, it used the average of direct labour cost. It does not basically calculate for one of the department. If the blanket overhead rate apply into a company, the company overhead rate will be average out and product A would be indirectly allocated with some of the overheads of department 2. This would not be satisfactory, since product A does not consume any of the resources from others department, but this department still have to incurs a large amount of the overhead
The overhead rate is the total of indirect cost for a specific reporting period, divided by an allocation measure. Overhead rate is the percentage that we get after comparing to the total overhead expenses with the total expenses. Overhead rate has differentiate into 2 types which is blanket overhead rate (single overhead rate) and departmental overhead rate. Blanket overhead rate (single overhead rate) is the most simplistic tradisional costing system. It assign indirect cost object by using a single overhead rate for the organization as a whole. Blanket overhead rate can be named as plant-wide rate or single overhead rate. It contain the same meaning within it. The term blanket overhead rate or plant-wide rate are used to describe …show more content…
The total manufacturing overhead for the manufacturing plant of Source Industries Berhad are RM 900,000. The company has selected the direct labour hours as their allocation base for assigning overheads to products. Assuming that the total number of direct labour hours are 90,000 for the period the blanket overhead rate for Source Industries Berhad is RM10 per direct labour hour (RM 900,000/90,000 direct labour hours).
This calculation has classified into two stages. First, overheads are accumulated in one single plant-wide pool for a period of time. Second, a plant-wide rate is computed by dividing the total amount of overheads accumulated (RM 900,000) by the selected allocation base (90,000 direct labour hours). The overhead costs are assigned to products by multiplying the blanket rate by the units of the selected allocation base (direct labour hours) used by each product. Source Industries Berhad is considering establishing separate overheads for each of its three production departments. The products made by the company require different operation and some products do not pass through all three department. These investigations also indicate that the RM 900,000 total product manufacturing and 90,000 direct labour hours can be analysed as …show more content…
To produce a product A requires 20 direct labor hours in department 3, and it does not pass through departments 1 and 2. By using the blanket overhead rate in production, the overhead cost of RM200 (20 hours at RM10 per hour) will be allocate to product A.
Besides, if a department overhead is used, and have a same situation with product A which department 3 is used and does not pass through department 1 and 2. There is only RM100 (20 hours at RM5 per hour) will be allocated to product A.
By comparing to two different overhead rate, we can realize that the department overhead rate is more accurate compared to the blanket overhead rate. This is because for the blanket overhead rate, it used the average of direct labour cost. It does not basically calculate for one of the department. If the blanket overhead rate apply into a company, the company overhead rate will be average out and product A would be indirectly allocated with some of the overheads of department 2. This would not be satisfactory, since product A does not consume any of the resources from others department, but this department still have to incurs a large amount of the overhead