Q5RQ - Horngren'S Financial And Managerial Accounting

Question

Why is the use of departmental overhead allocation rates considered a refinement over the use of a single plantwide overhead allocation rate?

Step-by-Step Solution

Answer

Departmental overhead allocation rates is not based on only one allocation base

Step 1: Meaning of Departmental Overhead cost

A department's overhead rate reflects the proportion of estimated overhead of a given department and the level of activities within that department. The conventional cost allocation strategy is to duplicate a standard departmental overhead rate by the number of units of action expended if the departmental costing approach strategy is employed.

Step 2: Uses of departmental overhead allocation

As departmental allocation rates are not dependent on a single allocation basis, they are considered an enhancement over plantwide allocation rates. Overhead is distributed to the merchandise that is worked on in each department employing departmental allocation rates. The allocation basis chosen for each department better represents how products truly employ each department's assets.

 

Using departmental overhead allocation rates is considered a refinement over using a single plantwide allocation rate.