Plantwide Overhead Rate Calculator
Plantwide Overhead Rate:
Understanding and Calculating Plantwide Overhead Rate
In manufacturing, it's crucial to accurately allocate indirect costs (overheads) to products to determine their true profitability and set appropriate selling prices. Plantwide overhead rate is a method of allocating these costs across all departments or cost pools within a manufacturing facility using a single, company-wide overhead rate.
What is Plantwide Overhead?
Plantwide overhead refers to all the indirect costs incurred in a manufacturing plant that cannot be directly traced to a specific product. These costs include:
- Factory rent and utilities
- Depreciation of plant and equipment
- Salaries of factory management, supervisors, and administrative staff
- Indirect materials and supplies
- Maintenance and repair costs
- Insurance for the plant and its assets
Why Calculate a Plantwide Overhead Rate?
A plantwide overhead rate simplifies the allocation process. By using a single rate for the entire plant, businesses can:
- Streamline Cost Allocation: Avoids the complexity of managing multiple departmental rates.
- Estimate Product Costs: Provides a basis for estimating the cost of goods sold and work-in-progress inventory.
- Pricing Decisions: Helps in setting competitive and profitable selling prices.
- Performance Evaluation: Can be used to assess the efficiency of production processes.
How to Calculate the Plantwide Overhead Rate
The fundamental formula for calculating the plantwide overhead rate is:
Plantwide Overhead Rate = Total Manufacturing Overhead / Total Allocation Base
The "allocation base" is a measure of activity that drives overhead costs. Common allocation bases include:
- Direct labor hours
- Machine hours
- Direct labor cost
- Number of units produced
The choice of allocation base is critical. It should be the factor that most closely relates to how overhead costs are incurred. For instance, if machine usage is a significant driver of overhead (like electricity and maintenance), machine hours might be a suitable base. If labor-intensive tasks are more prevalent, direct labor hours might be better.
Using the Calculator
Our calculator simplifies this process. You need to input:
- Total Manufacturing Overhead: The sum of all indirect manufacturing costs for a specific period.
- Total Direct Labor Hours (or other chosen base): The total number of direct labor hours worked in the plant during the same period.
- Total Machine Hours (or other chosen base): The total number of machine hours utilized in the plant during the same period.
The calculator will then compute the plantwide overhead rate based on the most common bases (Direct Labor Hours and Machine Hours) so you can see how the rate changes depending on the allocation driver.
Example Calculation
Let's assume a manufacturing plant has the following costs and activities for a month:
- Total Manufacturing Overhead: $500,000
- Total Direct Labor Hours: 10,000 hours
- Total Machine Hours: 25,000 hours
Calculation using Direct Labor Hours:
Overhead Rate = $500,000 / 10,000 Direct Labor Hours = $50 per Direct Labor Hour
Calculation using Machine Hours:
Overhead Rate = $500,000 / 25,000 Machine Hours = $20 per Machine Hour
This example shows how the calculated rate can vary significantly depending on the chosen allocation base. The company must select the base that best reflects its cost drivers for accurate costing.