Q4RQ - Horngren'S Financial And Managerial Accounting

Question

Question: Why is a single plantwide overhead allocation rate not always accurate?

Step-by-Step Solution

Answer

Answer

Plantwide overhead allocation rate is based on only one allocation base and uses that same allocation base to allocate overhead to all products.

Step 1: Meaning of Plantwide overhead rate

All indirect working costs are insinuated as overhead costs. These proceeding costs offer to help the firm run, but they are insignificant to the production of stock or services.  

Step 2: Explaining why is using a single plantwide overhead allocation rate not always accurate

Since it is based on a reasonable allocation basis and applies the same allocation base to all products, employing a single plantwide allocation rate isn't always exact. It's conceivable that the assignment base chosen doesn't reflect how a company's merchandise truly uses its assets (there might not be a direct cause-and-effect relationship with overhead costs). Activity-based costing (ABC), on the other hand, portrayed numerous exercises, each with its claim allocation basis, to more accurately speak to how products truly employ a company's assets (exercises). As a result, ABC costs align with real manufacturing expenses. Employing ABC cost data ought to make decision-making less demanding.